Stocks fell yesterday, ushered into the red by tech stocks, which featured Alphabet’s disappointing results. Traders are unsure these days over what is good and what is bad leading to inactivity, which leads to painful volatility.
Eyes on the prize. Sometimes I have to be reminded of the most obvious things. The world is a more complex place than ever I can remember in my life. A big part of that is that we are all inundated with information 24/7. There is so much of it that it is hard to determine what is even credible (just some person’s opinion to serve their needs), let alone useful. All of that information can lead to indecision and anxiety… two dangerous traits to have when investing. Ok, so let me provide you with some primal clarity.
The stock market is not an ATM machine where you walk up, insert some $10 bills and a greater amount of $100 bills come out another slot. I know that you know this, but perhaps it got lost under some pile of other information that has been accumulating over the past couple of years. It is understandable as so much has happened. You can tell by the unprecedented use of the word “unprecedented,” which seems to have overtaken us. So, back to the ATM machine and the basics. The stock market pays us to take risk. Without risk, potential return cannot… should not be expected. Of course, you could get lucky, but “luck” is rare on Wall Street, and if luck is what you are after, the lottery is a perfect place… “all it takes is a dollar and a dream,” goes the famous tagline. Assuming that you are looking to make well-informed investment decisions, you must start by weighing your risks. Can you afford to take risks with your money? What level of risk are you comfortable with? No matter how you answer those two questions, it should be clear that you will have to take some level of risk in order get some return. Here is the problem. For the most part, risk is positively correlated with return. More risk, more return… and vice versa. I am sorry if I am telling you what you surely, already know, but I have a point to make.
Let’s go with an example. If the S&P500 gains 10% and you would like to earn more, you will have to take on more risk than the S&P500. Perhaps look for stocks within the index that have greater potential than the whole. If we can find those through careful due diligence, we can potentially beat the S&P500. But here is the twist. It doesn’t come for free. You still have to take on the additional risk. Let’s step back and define “risk.” For our purposes, let’s just call it volatility. That is something that we have all been refamiliarized with in the past 18 months. I purposely used the word “refamiliarized,” because volatility has always been there, but we quickly forget.
I am just going to jar your memory for a minute, then, I promise, I will get to my point. Let’s use one of our favorites, Apple as an example. I am going to pick a random date after the 2008/2009 recession. There it is, I picked it. It turns out to be March 31st, 2010 (it really was random). If you bought the stock and held it until yesterday, you would have earned +1,961%! That is an annualized return of +24.95%. I know, I know, it was obvious that Apple was a great company, and its products continue to be… um, awesome. You knew, you held it, and you deserve those returns. But, my dear friends, those returns didn’t come for free. Do you remember fall, 2012? I will remind you. The stock fell for what felt like 8 months, losing some -44%. Did you sell at the low? No, you held on. You were rewarded, because the stock began to gain once again after a challenging number of months. Then came the summer of 2015, after which we had about 10 months of volatility which saw the stock losing around -31%. Did you sell? No, you held on. Another -31% drawdown happened in the final quarter of 2018. Then there was the onset of the pandemic… another -31% decline. How about last year? That was a bumpy -31% decline. Did you sell at the low? No, you didn’t. You watched it bounce off its lows to gain +56% to its early summer peak this year. It has since given up some -12%. You are not going to sell. Why? Because you know that the company is doing well, and this volatility is simply the cost for the +1,961% return you have made on your investment. Ah, now you remember. Do you want me to tell you how much the S&P500 grew during that period? Ok, it gained, just +258%. That is great… unless you were hoping for more. But now you remember, you will have to pay for that by adding some risk. Now to my point. I know you are feeling the stress of this volatility which does not seem to relent. You are concerned about the uncertainty in the months ahead. Ask yourself this question. Can I afford to take the risk of this volatility, knowing that ultimately, if I have done my homework and picked stocks with great potential, that I will make great long-term gains? If the answer is “yes” then, carry on and maintain your long-term focus. That is what got you here. If your answer to that question was “no,” then make some careful, well thought out adjustments to lower your volatility. Investing for success takes patience.
WHAT’S BOUNCING ABOUT THIS MORNING
International Business Machines Corp (IBM) shares are higher by +1.04% in the premarket after it beat EPS and Revenue estimates by +3.84% and +0.46% respectively. The company also reaffirmed its full-year guidance. Not surprisingly, the company’s CEO attributed growth in its software and consulting business to its Watson AI platform. Dividend yield: 4.84%. Potential average analyst target upside: +5.4%.
Meta Platforms Inc (META) shares are down by -3.85% in the premarket despite announcing solid beats on EPS and Revenues. The decline is due to a conservative Q4 guidance and a slight softening of full-year guidance. The company attributes the conservatism to uncertainty in the global economy, which analysts have ascribed to the current turmoil in the middle east. Potential average analyst target upside: +25.9%.
YESTERDAY’S MARKETS
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