oh my gosh tech stocks are down big time here's a few examples facebook down 11 tesla down 17
zoom down 20 and that's just in the last month alone and then you have etfs such as qqq that
is down 12 arc down 24 now on the other side of tech stocks you have value stocks check these out
though in the last month we have coca-cola that is actually up two percent chevron up just about
seven percent and wells fargo up nine point two five percent now in this video we're gonna talk
about why tech stocks are down and why value stocks are seeming to be okay we're gonna talk
about why this is happening so you can become a more knowledgeable investor you know the whole day
was just down down down i don't know about you but i was looking at my portfolio and i'm just like oh
god i think i still have a headache so let's talk about this as an example of what's happening
with the fed now if you're not aware of course the fed has inflation to deal with inflation's
going up high the highest it's been actually since 1982. now the fed has a decision to make
what do we do to control inflation well a lot of times they raise up interest rate
which means it's going to cost more to borrow money and when it costs more to borrow money
that can cause a little bit of issue especially if you're an innovative tech company and if you're an
innovative tech company when you have all this money your profits could sometimes not look as
good as they want to in fact the demands of your shareholders might not be met because you have to
deal with a high interest rate but let me give you a cool example pulling up the whiteboard
let's say we want to make the next iphone now this is going to be an awesome iphone this isn't
just the standard iphone it's going to be the next level of iphone and apple's thinking okay
how do we do this how do we make the best next iphone in order to do that we need to make a
capital investment of 10 million dollars so i'm gonna write this out here is 10 million
dollars because that's how much we think it's going to cost and that's how much money we need
in order to develop and innovate the next iphone but the problem is something called our weighted
average cost of capital which means the cost it's going to take to fund that 10 million dollars in
order to innovate the next iphone so the weighted average cost of capital let's say this is about
six percent for the purpose of this example now what i'm going to do here is i'm going to
go through this and then i'm going to explain to you why the fed messing around with the interest
rates is what's impacting the tech stocks and why you're seeing them take a temporary fall
down so let's say for example we are going to start selling the iphone
and we're gonna sell the iphone over the next five years and we expect to make cash flow which
means we're gonna make some money we're gonna make some money on our iphone so the 10 million dollars
we expect to make that investment back through the sales of the iphone so in year one
we're gonna expect to make once this thing is launched about eight hundred thousand dollars
and then in year two our iphone sales are really gonna take off we're gonna make a million
year three we're gonna make another two million year four it keeps going up now we're making three
million lots of people are learning about this new iphone and they have the money to buy it and we're
making more money and then in year five we're gonna make four million dollars now if i add up
the cash flow over the last five years of all of our iphones that means we made a total of 10.8
million dollars which is pretty darn good because the fact is we invested
10 million dollars to start up this project and that means we made about
eight hundred thousand dollars by doing this over the last five years but hold on
there's a little bit of a thing we got to remember and that's that weighted average cost of capital
this is what it would be as far as revenue coming in but we got to realize we have the debt we have
to pay off of the 10 million dollars and that comes with a percentage of about six percent
now i'm trying to make this as easy as i can for beginners my initial video when i first recorded
this i was going into way too much financial jargon and it was making my own head hurt so
i'm trying to make this make sense but let's look at our actual cash flow over here and what we're
going to do over here is we're going to look at it with the six percent taken off because of course
we need to pay back some of that average cost so in year one the actual 800 000 is worth about 754
717 that's the actual revenue minus the cost of capital and then year two is actually 943
396 and i'll fill in the rest of these for us three and there we are fold them
all in so this is with the six percent so let's add up the total down here
and that's 10 million 188 000. i'm going to round up so 10 million 188 000 that means
that we actually made because you got to subtract out the investment of 10 million
that means we profited 188 000 so that's the net present value that's a good thing that's what we
want to see but the problem is now where we come into the fed so if the fed decides it's time to
rise up this six percent make it cost a little bit more money to borrow money if we want to do a 10
million dollar investment in a brand new iphone to develop the next best thing it's now going to cost
three percent more so let's say the fed raises the rates and now our weighted average cost of
capital is nine percent now what i'm gonna do is i'm gonna hop over here to the excel spreadsheet
things get a little bit more interesting so just like the ipad we have the 10 million investment
with the six percent here's our cash flow that we looked at here is the actual cash flow at
minus the six percent which means there's our 188 thousand dollars that's a good thing
but here comes the three percent add-on which means it's not gonna cost us nine percent
for the development of the iphone if we do this if the fed raises up the rates look what happens
this goes negative which means over the next five years the development of our fictional iphone
that we're talking about in today's example is a bad deal and that is what's going on
with the fed so what happens in tech world when you talk about tech stocks they have a high demand
these are the people that are innovating for us and i'm not just talking about apple i'm talking
about tesla and anything out there that really is designed to innovate to make our lives better well
they come with a lot of overhead you got a lot of research and design and production cost and at the
same time in order to fund that beyond just your typical raising of capital from your shareholders
you have to take out debt when you take out debt and the fed racks that up and puts that percentage
up you get impacted more than a chevron more than a freaking coca-cola who already has a pretty
standard business design let's be honest coca-cola could put a lot more money into innovation but
really they're doing pretty darn good and that's why right now they don't get impacted as hard when
the fed starts thinking about hawkish things like raising up the interest rate and that is why this
is going on but you might be wondering especially if you're a new investor what do i do i mean i
have these tech stocks bought into them i thought i loved them but they're down significantly do i
just cut my losses do i just sell out well here's what i would recommend you do get
yourself some knowledge first and determine what your game plan is we'll talk about your game plan
and i'm going to share with you an actual example of what is happening in the fed and how that's
actually impacting the tech stocks so first of all let's talk with your game plan first of all think
about whatever your favorite tech stock is do you know trust and believe in that company if you do
you really gotta weigh in judge do i really just panic right now in this market downturn or do i
let it ride for the long term now me personally i'm a long-term investor so i'm going to be one
that holds on for a long period of time no matter what happens in fact there is a stock i'm still
down about 28 on and i've been down on it since 2018 but i'm a long-term investor and i trust
and believe in what they got going on and i know over a long period of time they'll get back up
to where i need them to be but remember with this knowledge you can make now a better decision what
you're going to do with your tech stocks are you going to decide to hold on and know that
in the long term this will all kind of balance out once inflation is under control or do you think
that it might be wise to sell and buy something different only you can be the judge remember i'm
just some guy on youtube who sometimes looks like woody from toy story take that for what
it's worth do your own research check out this video next and we'll see you on the next video