INTRO: Ever since the pandemic started and Jerome
Powell started the money printer, the stock market has only gone one direction up. This has trained
millions of retail investors who started investing during the pandemic to constantly buy the dip.
If a stock sells of 3 to 5% it’s time to buy and if a stock sells off 10% it’s time to go all in.
Ironically, when people buy these quote-on-quote discounts, they’re simply investing at all-time
high levels from a few days or weeks ago. So, it’s not like they’re really getting a discount,
but we can’t really blame them because this is all they’ve seen. In fact, throughout all of 2021,
the S&P 500 didn’t even experience a single 10% correction. The largest sell-off the index saw
last year wasn’t even 6%. So, it makes sense that many retail investors have been trained
to go all-in on even the slightest of pullbacks. Many are even claiming that this is simply the
new normal and that we’ll never see another 40 or 50% correction in the stock market. But
this is actually the most dangerous sentiment to have because the tops of bubbles are literally
called the “New Paradigm!!”. So, here’s the truth about stocks that don’t come back.
THE DISRUPTORS:
Starting off the list, we have the innovative companies or the growth companies that have
dominated the market over the past 2 years. Often, these companies promise to revolutionize how we
do everyday tasks. For example, instead of building up a strong network of taxis
that’s easily accessible, these companies will promise to provide you with self-driving cars.
Or instead of building more stores and carrying more inventory close to where you live, they’ll
promise to deliver any product straight to your doorstep. Generally, these companies have the best
of intentions, but they don’t have the best of balance sheets, so it just takes a simple market
downturn to wipe them out completely. Take Mark Cuban’s Broadcast.com for example. In the 1990s,
Broadcast.com allowed users to stream audio and eventually even video through the internet. Given
that most of us spend hours streaming podcasts, music, videos, and movies today, this was clearly
a great idea. And multiple hundred billion dollar companies have been built based on just streaming
one or two types of media. Yahoo could see this future in 1999, and that’s why they agreed to buy
Broadcast.com for $5.7 billion. But, even Yahoo couldn’t sustain the company through the dotcom
crash, and they ended up shutting down one sector after another until they shut down the entire
company. Another big bust from the dotcom era is Pets.com. The idea of Pets.com was simple: sell
pet toys and food through the internet to make these products more accessible and convenient than
ever before. They had big investors on board like Amazon who at one point owned half the company.
This allowed Pets.com to complete an extremely successful IPO raising over $300 million.
Yet, just 268 days later, they went bankrupt thanks to the dotcom crash.
Now, Pets.com wasn’t a bad idea by any means. Chewy basically executed the same concept a
decade later and they’re worth nearly $20 billion today. So, clearly, the idea doesn’t really matter
when we’re talking about a stock market crash. The only thing that matters during a downturn is
the balance sheet because if a company can’t survive the downturn, they’ll never actually
release they’re quote on quote “revolutionary product or service”. And that’s just two examples.
52% of all DotCom companies went bankrupt by 2004, and there’s no doubt that that included
dozens of brilliant ideas. So, clearly, simply investing in a company with a good idea doesn’t
guarantee investment growth. In fact, during the dotcom bubble, most of the time it didn’t.
THE SURVIVORS: Ok, so betting on unprofitable
disruptors is basically just a gamble. But what if you’re not investing in the unprofitable
disruptors like Rivian, Lucid, Teledoc, and Nanodimension. What if you’re investing
in profitable disruptors like Tesla, Shopify, and Square. These companies will most likely
survive a multi-year bear market with no additional funding. So, buying the dips
on these companies is relatively safe right? Well, if you hold long enough, then probably,
but you’re also likely looking at several painful years ahead. For example, take a
look at dotcom favorites that actually survived and ended up becoming big. Before Amazon became
a trillion-dollar e-commerce giant and liberals started hating Jeff Bezos, Amazon went through
the dotcom crash. And Amazon didn’t sell of 40 or 50 or even 70%. Amazon sold off a painful
95%. At that point, you’d probably be questioning if the company is gonna survive regardless of how
the balance sheet looks. But, even if you stayed invested, you would’ve had to wait 7 years just to
almost breakeven. And then, the 2008 financial recession would hit, and you’d be down 70% on
your initial investment once again. It wasn’t till November of 2009 or 10 years after the dot-com
peak that you would actually start making money on Amazon. Another great example is Booking holdings.
Booking holdings was a travel booking company that went hyperbolic during the dotcom bubble,
and it’s still around today and it’s doing better than ever before. But like with all companies that
were founded during the dotcom bubble, it had to go through the dotcom crash first. And this time,
we’re not even talking about a 95% crash, we’re talking about a 99.36% crash. This means that
for every $100 you invested into Booking holdings, you would have just 64 cents or not even a dollar
left at the bottom of the crash. And it took Booking Holdings 14 years just to recover to its
dot-com peak. Also, it should be noted that even today, while Booking Holdings is at $2000 a share,
that’s only a 2X from its dot-com peak meaning that it took 25 years to just double your money.
Even just investing in the S&P 500 would’ve given you a better return, not to mention,
you would’ve never been down 99.36%. So, while you may not lose money if you go
all-in on a disruptor that survives, you could easily be waiting a decade just to break even.
STUCK FOREVER:
Ok, so disruptors are dangerous. You’re could either lose it all or you could end up waiting
several years just to breakeven. But, what if you don’t even mess with disruptor or growth stocks.
What if you’re a blue-chip investor that only invests in the largest and most stable companies
in the world like Apple, Microsoft, and Google? Is it ok to go all-in on dips in this scenario?
Well, not really. In fact, I’d say this is worse than going all-in on a profitable disruptor. With
profitable disruptors, you can be sure that if the company is able to weather the downturn,
they’re probably going to the moon once the market recovers. The same cannot be said about
slower-moving large-cap companies. Here’s the thing, while we like to often complain about
companies being too powerful and having too big of a monopoly, companies don’t stay at
their peak forever. In fact, if you’re gonna be deterministic about anything in the stock market,
it should be that companies come and go. And with the rise of technology and rapid disruption,
the lifespans of companies are getting shorter and shorter. In fact, Mckinsey & Company found that
the average time a company stays in the S&P 500 is just 18 years. Considering this, they predict that
75% of companies that are currently part of the S&P 500 will have disappeared by 2027. Also, even
if they don’t disappear, it’s very likely that they become a shell of their former self. In the
2000s, the companies that dominated the fortune 500 were GE, Exxon, Proctor & Gamble, DuPont,
and so on and so forth. While these companies are still around, disruptors like Apple, Microsoft,
and Amazon have grown to become 10 times larger. But, wait a minute companies like market giants of
the past like GE and Exxon weren’t tech giants, so they had a tough time keeping up with tech.
Companies like Apple and Google should have a far better shot at keeping up right? Well,
this is not exactly true either and the best example of this is Cisco. During the dotcom
bubble, it wasn’t just speculative companies that got bid up, but also the biggest tech companies
in the world. At the peak of the dotcom bubble, Cisco became the world’s largest company boasting
a market cap of $500 billion. If we adjust for inflation, that’s $823 billion today. Since then,
22 years have passed, yet Cisco is yet to put in a new all-time high. In fact, it’s currently still
32% away from its dot-com peak, and that’s with Cisco doing a bunch of stock buybacks and trying
to soften the downfall. If we just look at their market cap, it’s currently less than $250 billion
meaning that the stock has to run over 100% just to reach their peak market cap from 22 years ago,
and that’s not even accounting for inflation. Cisco isn’t just a one-off exception either.
Other top 10 companies that never recovered include Intel and AT&T. Who’s to say that Apple
isn’t the next Cisco? I mean have seen the last 4 generations of iPhones? Only time will tell,
but just keep in mind that going all-in on tech giants may not be as safe as you think.
INDEX INVESTOR:
And finally, that brings us to the index fund investor.
If you’re gonna constantly go all-in on every dip, indices are definitely what you want to be buying,
but I suspect that most people who are FOMOing into stocks aren’t FOMOing into index funds.
With that being said though, it’s not exactly a good idea to FOMO into index funds either.
Take the Nasdaq for example. After the dotcom bubble burst, the Nasdaq crashed a whopping 83%.
Keep in mind that the Nasdaq is a combination of 100 of the largest and most profitable companies
on the market. Yet, it was able to crash 83% within a few years, and it took a long
and drawn-out 17 years to return to the dot-com peak. Many of you guys watching probably aren’t
even 17 years old. If you invested in the S&P 500 instead, you would’ve had a better time,
but not by much. First, you would’ve experienced a 50% crash along with a 7 year-long wait to
return to all-time highs. Just when you think things are finally going to go bullish again,
you’re hit with a 57% crash that takes you to lower levels than the dotcom crash. And
it’s not till 13 years after your initial investment that you finally start to make money.
So, as you can see, if you go all-in at the wrong time, you could still easily be stuck
for well over a decade even with an index fund. But, at least you can be sure that
index funds will recover sooner or later right? Well, Michael Burry seems to think that index
funds are actually in some sort of crazy bubble themselves due to the rise of passive investing,
and that index funds are doomed to crash and not recover. But that’s a whole nother discussion.
COURSE OF ACTION:
So far, we’ve gone through several examples and hypotheticals, but the lesson at the end of the
day is to just not FOMO into the market. Just because the market dips 10 or 15 or 20% doesn’t
mean that you should bet the farm on an index or any individual stock. This type of behavior is
what leads to people resenting the stock market and missing the best buying opportunity of the
decade. By the time the stock market actually bottoms, they’ve either stopped investing
or they ran out of serious capital a long time ago because they just kept buying every dip.
So, what should you do instead? Well, this is not financial advice, but the smartest course
of action in my opinion is simply a long-term weighted dollar-cost averaging strategy.
Maybe every week, you invest $100 into the S&P 500. This way, regardless of what the market is
doing, you have at least some money going into the market. This is extremely important because the
only risk that’s bigger than FOMOing in at the top is the risk you’re taking by not investing
at all. Anyway, going back to the plan, if the S&P 500 is down over 10% from its all-time high,
maybe you could cut back on spending and invest $200 per week. And if it’s down over 20%,
maybe you could live on sticks and bones and invest $300 a week and so on and so forth.
That’s just one example of what you could do, but there are several great long-term strategies
that you can implement. It doesn’t really matter which one you choose as long as you stick to it,
don’t let emotions alter your plans, and most importantly don’t be deterministic
about anything as no investment is too big to fall. But that’s just what I think. Have
you guys felt any FOMO in regards to the stock market within the last two years? Comment that
down below. Also, drop a like this video helped you realize how brutal the stock market can be.
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