Holy moly, the end of the year sell-off has been absolutely wild so far. The fear and
greed index is now showing extreme fear and bearishness is at a record high for the year.
As the broader market continues to panic sell, I've been getting tons of questions on every
episode, as well as on Twitter, on Discord, and on Patreon. I'm really grateful that so
many people are reaching out and asking questions instead of straight-up panicking and acting
on emotion. That already makes you a better investor than most, including most fund managers,
who are panic selling to pad their end-of-the-year performance numbers. Seriously, seeking answers
is exactly what you should be doing in times like these. So, I spent the weekend reading
through and organizing all of your questions, and I'll be answering them in this episode.
I'll throw in every quick tip I can think of to give you every edge I feel I have from
doing this full time. These kinds of Q&A sessions are usually exclusive to the hundreds of people
supporting the channel as patrons on Patreon and channel members right here on YouTube,
so if you're one of my supporters, thank you so much. Your awesome support makes this extra
content possible and it means even more to me knowing your own portfolios are probably
hurting right now. Since this one is getting posted publicly, I'll do another member-exclusive
Q&A later in the month for you. And for everyone else, as always, I'm not a financial advisor
and nothing I say here is ever financial advice. Your time is valuable, so let's get right
into the questions.
The first and most basic set of questions I've been getting is: what should I do right
now?
The answer is that you should learn how to read the market. Warren Buffett famously says
that you should be fearful when others are greedy and greedy when others are fearful.
How do you know when others are being greedy or fearful? Well, if you go check out CNN's
Fear and Greed Index, you'll see that we're in extreme fear terrority. That article explains
all of the factors they use to arrive at that number. For example, when people flee to safety,
the demand for bonds goes up. As the S&P500 draws down toward its 125-day moving average,
people become more worried it will crash. There are a lot of other indicators on this
list that serve as a great introduction to understanding what the heck is actually going
on at a high level. At the end of this list, CNN also shows you how the Fear and Greed
index has changed over time. Today, it's very low, indicating extreme fear. Here's my extra
tip for you: sentiment isn't the only thing that moves the market. Change in sentiment
also moves it. People switched from extreme greed to extreme fear very quickly this time,
which is why we're seeing such a large sell-off in the riskiest assets -- the exact stocks
and cryptocurrencies I focus on. Another place to track this is the AAII sentiment survey,
which updates weekly and shows the ratio of people with a bullish, neutral, or bearish
market outlook over the next 6 months. According to the latest survey, bearishness is at a
yearly high and bullishness has been steadily trending down all month. I recommend you bookmark
both of these websites, which I've linked in the description below. When I see the market
getting to extreme fear territory, I start PREPARING to be greedy. I add cash to my brokerage
accounts. I catch up on all of my highest conviction stocks. I organize my watch list.
All the same things I've been saying for the last few weeks. That brings us right to the
next question.
How do I decide when to buy a high conviction growth stock versus putting more money into
a cash-like position?
So, the first thing I look at when I decide to put any money into the market is this fear
to greed index. The next thing I check is market volatility, which is one of the components
of this fear and greed index. The VIX, ticker symbol V I X, is a forward-looking measure
of the volatility of the market, specifically the S&P 500. How can it be forward-looking?
It looks at options on the S&P500 with near-term expiration dates. That means it's literally
just another gauge of sentiment, but more near-term, and only from people with money
on the line; the ones buying those options. When the VIX is below around 12ish, the market
isn't expected to be too volatile in the near term. When the VIX is between 12 and 20, normal
market volatility is expected. When the VIX is above 20 or so, people buying options think
the market is going to be very volatile and prices might change very fast. Here's my extra
tip for you here. In addition to the VIX, I track the VXN, ticker symbol V X N. This
is the same exact thing except it's for the NASDAQ instead of the S&P500. The VXN is a
better indicator for the stocks I focus on since the NASDAQ is filled with tech stocks
specifically. It's also A LOT more volatile, which means I end up being much more conservative
in when I decide to buy. Here's exactly how I use these indicators. When people are getting
more fearful and volatility is high, I put my money in my cash-like positions or straight
up leave it in cash. To me, cash-like positions are companies like Google and Facebook, and
Microsoft. I have literally never ever regretted holding these companies over long periods
of time. But when volatility is too high, even these stocks can come down; that's when
I stick to cash. I'm literally at around 50% cash right now. When I see volatility coming
down and the fear and greed index moving back toward greed, I tend to move more of my money
into my high conviction growth stocks. Let me know in the comments below whether that
makes sense to you or if I should clarify any of that. I'm excited to hear what you
think. Alright, let's keep things moving with the next question.
With everyone panic selling at once, prices are coming down very fast. Should I buy in
all at once or slowly average in?
In my personal, non-professional experience, I've never regretted slowly averaging in or
out of a position and have almost always regretted buying or selling all at once. For example,
I started my $100,000 portfolio project in October, so just 2 months ago. Imagine how
silly I'd look if I spent all my money at once, only to have all my stocks drop by like
40% just a few weeks later. Here's another example: a few of my friends just bought ARKK
at $99 dollars a share. That's a great price, but ARKK is now $95. Whoops! So, instead of
trying to catch a falling knife, I do exactly what I've said before: I get my cash ready
and keep my watch list and portfolio organized. For each high conviction stock, I catch up
on the latest earnings reports at a bare minimum, but usually, I'll listen to the whole earnings
call and see what ARK Invest and my favorite YouTubers are saying about these stocks as
well because they often catch something I missed myself. Then and only then do I look
at the price charts for the stock specifically and decide if I want to buy and at what price.
That brings me to the next question.
Since many of the companies I look at are unprofitable, what metrics do I use to value
a company?
Long story short, the two metrics I care about most are the EV to EBITDA ratio, which I'll
probably do an entire video on at some point, as well as the price to sales ratio, which
I use instead of price to earnings since many of the companies I invest in... don't have
earnings. Yet. I hope. Here's a good rule of thumb for price-to-sales for software-like
companies. Take the forecasted 3-year compound annual growth rate of a company's revenue
and cut it in half. That's the price-to-sales multiple you'd probably be willing to pay.
Again, this ONLY applies to software-like growth companies like the ones my channel
focuses on, so don't go using it everywhere. If that just sounded like a bunch of mumbo
jumbo to you, no problem. Let's work through it, using Stone as an example since they literally
just gave us this number in their most recent quarterly earnings report. The current 3-year
compound annual growth rate of Stone's total revenue is 53%. Wow. Very high. Let's say
I expect 40% over the next 3 years, even as they launch new products and services and
acquire more customers across more verticles. 40 divided by 2 is 20 - that's the price to
sales I'm pretty happy to pay. Stone is currently trading at a price to sales ratio of 11, far
less than 20. It's trading at a lower price to sales ratio than Microsoft right now, which
is one of my cash-like positions. When I made my first episode on Stone stock, it was trading
at a price to sales ratio of, you guessed it, around 25, which is half of their 3-year
revenue growth rate. That's what it means to be a data-driven investing channel. I honestly
don't work too hard to find crazy stocks from every market sector like I used to. Instead,
I've built one system of indicators and metrics that works for one pretty small set of stocks
and I stick to that set, which are mostly software-oriented high-tech growth stocks.
That leads us right into the next question.
What stocks am I watching the most right now?
I recently made an episode called Top 9 High Growth Stocks to Buy for 2022, which is my
answer to this exact question. I'll leave it in the top right-hand corner of your screen
right now and in the description below as well, along with all the other indicators
and resources that I talked about earlier. The follow-up question I got the most on that
episode was: Am I still confident in Tesla, Teladoc, Zoom, Pinterest, Ginkgo Bioworks,
Palantir, Mercado Libre, Wejo, and every other company I didn't mention in that episode?
The answer to that is yes, definitely, unless I specifically said otherwise. The point of
that episode was to give investors different growth stocks at varying levels of risk, from
relatively low-risk ETFs with 40 stocks all the way up to Stone, which is a risky stock
in a risky market in a risky part of the world. For example, at the time of this recording,
Teladoc is trading at a price to sales ratio of 8 and Mercado Libre is trading at under
9. Those were the next 2 companies to make that list, but I wanted to keep that episode
fairly short and sweet. I actually bought some shares of Zoom and Teladoc while making
this episode, even though they weren't on that list. So, if you want to see the updated
list of stocks I'm watching and get notified when I buy them, consider supporting the channel
as an Insider tier patron on Patreon or channel member right here on YouTube. Otherwise, I'll
do my best to keep you up to date with each episode, just like I've been doing, so there's
no pressure either way; the portfolio project is just another way for me to try and add
some value. Speaking of my portfolio project here's the next frequently asked question:
Are you still buying ARK Invest's ETFs now that you're doing your own portfolio project?
Yep! The reason I don't have ARK's funds in my portfolio is that that would defeat the
point of showing you how I would manage my own positions, starting from scratch. I think
ARKK, ARKG, and ARKW, which are ARK Invest's 3 biggest funds by assets under management,
all got hit disproportionately hard relative to the rest of the market, because people
think the stocks Cathie Wood buys are stay-at-home-stocks.
In reality, she's found some of the most fundamentally misunderstood stocks on the market and is
buying them from other people before they realize that they're not stay-at-home stocks,
but go-online stocks. Stay competitive stocks. Solve problems globally stocks. When stocks
are misunderstood, their prices swing a lot because the market doesn't agree on how to
value the underlying company. These price movements are exactly how the stock market
transfers money from the impatient to the patient and from swing traders to long-term
investors. I gobbled up some ARKK and ARKG recently in my retirement accounts. These
are the kinds of funds I like to buy low and then forget about for years at a time. Speaking
of buying the ARK funds low, the next question is...
With the possibility of inflation and another wave of the pandemic, do you see ARK Invest's
prices going much lower?
I've been saying this for a couple of weeks now but I think this really depends on what
happens at the December 14th federal reserve meeting and what the exact plans for the tapering
of quantitative easing is. It also depends on what's actually going on with the new strain
of the pandemic. Is it a big deal? Is it nothing? How will the market digest new information
on it? What I will say is that I think volatility will come down over time as patient investors
and institutions scoop up great stocks at bargain-basement prices from impatient investors
who are letting them go without really understanding what they're holding. The lower ARKK goes,
the more attractive it should become, because we know Cathie Wood has a $420.69 price target
on it 5 years from now. Yes, the math really works out that way, based on a recent interview
where she said that she expects ARKK to roughly quadruple from its current price, which was
$105 per share when she said that. 4 times 105 gets you to 420. Now that ARKK is 95 dollars
a share, Cathie Wood should be expecting a 4.5x from here, or roughly
a 35% compound annual growth rate over the next 5 years. Another question along these
lines I get is about ARKG.
Now that tech has gotten much cheaper in general, what do I think about ARKG specifically?
So, I really like ARKG specifically because I know so little about healthcare in general
and anything genomics specifically. The reason I buy ARKG is because the companies inside
it have very little in common with the companies I tend to research and pick, which means their
prices should move pretty differently in normal market times. This is also the problem with
ARKG -- when you buy something for a mathematical reason, like spreading out your risk, you
don't really build a lot of conviction in it. Then, when more mature and better-understood
technologies get cheaper, the opportunity cost of ARKG looks high because those technologies
are still relatively young and now you can't remember why you're holding it. He's a thought
exercise to illustrate what I mean. Imagine the price of ARKG and Tesla both fall by exactly
50% right now. Which one are you going to buy? How come? Here's another version of the
same exercise: every asset you watch just fell 80%. Whole market tanks. What're you
buying and what're you selling? That's a good conviction test. The next question is why
are you holding stocks you'd sell instead of buy when they're 80% off? That's the problem
with ARKG, in my opinion. You want to hold it when you hear about it, but never more
than you want to buy your highest conviction stocks when they go on sale. And speaking
of conviction, here's the final question I get asked very often lately.
Am I still convinced companies in ARK will deliver returns and have long-term success?
Yes. Now more than ever as long as we're clear about what long-term means. To me, it means
over the next 5 to 10 years. Not weeks, not months, years. I'm not here to day-trade.
I'm here to build a machine that makes my money work for me instead of me having to
work for my money. I believe ARK Invest's ideas about the future are helping me do that.
If you tally up all the content on my channel, something like 85% of it talks about Cathie
Wood, ARK Invest, something their analysts said, or some portion of their research. The
more I read and listen to and absorb, the more convinced I am that they see something
in the market that no one else does, which is that at least 5 huge technology platforms
are coming together to transform our daily lives, regardless of what stock prices are
doing this week or next. Tesla is down almost 20% from recent highs. Most of you wouldn't
dream of selling it and some of you can't wait to buy even more. But Tesla isn't the
only company we should have that same level of conviction in. So, what other companies
will deliver these changes to our daily lives and the exponential long-term gains that come
with that? That's what I'm trying to find out.
So, stay long, stay strong, and thanks for watching. Until next time, this is Ticker
Symbol YOU, my name is Alex, reminding you that the best investment you can make... is
in you.