Paul Winkler: Welcome. This is “The Investor Coaching Show.”
Paul Winkler, talking about money and investing. Educating, because that’s what we do around here.
Now, I was looking through The Wall Street Journal and looking through an app on my phone, and I thought, “You know what? I’m going to do this little thing on just the news.”
What if you open up your phone: As an investor, you’re trying to figure out what to do.
Is it a good time to get in the market? Is it a bad time to get in the market?
Is it a good time to stay on the sidelines because things look kind of crazy out there?
Or is it a good time—I got cash. I’m trying to think, Do I stick that in the market?
Do I not stick that in the market? Do I wait until I get a little bit more clearer sign?
And that’s a hard decision to try to grapple with. And it makes it even harder if you read the news, and you start to understand a little bit what makes it so hard.
It’s kind of interesting, actually.
Headlines Can Make Investor Decisions Difficult
So I just thought I’d just scroll through my phone for a second and just look a little bit about what’s being written out here.
So let’s see: Fed poised, interest rates, shrink portfolio.
We talked about interest rates and the Fed quite a lot lately. I’ll skip that one.
“EU Proposing Ban on Oil Imports, Sending Prices Higher”
Okay, yes. So we got an expense issue coming along.
How about something about the economy? So you have the ex-Fed chairwoman, Janet Yellen, saying the U.S. economy remains strong.
So you got that. That’s a good little positive thing right there.
Oh, this one: “The Pandemic Normal Is Here and It Isn’t That Special”
This one says that “There’s more behind the stock market’s downdraft than higher inflation and interest rates. It is also a sign that the economy has arrived at a new post-pandemic normal—and it isn’t as lucrative as investors had hoped.”
So investors want companies to be more profitable, and this change has made things a little bit more rough to get to that lucrative state where we’re making more profits.
And, let’s see, what else do they say?
“A pandemic catalyzed a once-in-a-generation change in consumer, worker, and company behavior, a shift to remote life and work accompanied by digitization of business models.”
With this, it hits me here as I’m reading this, going, “Well, if you think about it, it’s a new normal.” And they’re saying that it has affected the stock market, their downdraft in the stock market as they start off.
Is the “New Normal” a Disappointment?
And then they talk about that, and they say, “Well, which market?” Well, if you think about it, the area of the markets that have been hit the hardest are the ones that most American investors tend to be most focused in, which is large U.S. stocks.
Now why would companies be large? Well, maybe because the model that they used was the most lucrative in the past, right?
So what would’ve been the most lucrative in the past? Going to the consumer through retail outlet stores, getting out and about, shopping.
Maybe it just may be that the new normal is going to create new markets in other areas.
Think smaller companies. You need to be more invested in smaller companies simply because historically the returns are higher.
There is one of the reasons that I tell people that we tend to be a lot smaller than if you look at the big mutual fund company.
I just did a workshop on this where I was actually taking the biggest companies out there—Fidelity and Vanguard—and taking their models of their portfolios and looking at the average market cap of their funds that they manage: their target funds, or their life strategy funds in the case of Vanguard and Fidelity, their asset manager models that they have.
And I just looked at, okay, what’s the average size of the companies in there? And it was way, way bigger than I would have.
And you look at that and go, “Well, if there’s a new normal out there, and we’re trying to adapt to it, who is going to be better at adapting to that?” Companies that are up and coming.
And the reason being is because older, more stodgy companies that can’t make the move as fast. And it’s challenging for them, because they’re already big, for them to get even bigger.
So I look at that and go, “Well, you know what?”
Really if you look at this, you say, “Okay, so a company that has already ‘been there, done that’ and is an old technology wouldn’t necessarily change.”
Now, Amazon became very, very big. Why?
Because they capitalized on this idea that people weren’t necessarily going to go shopping directly at the places. Then they couldn’t get out anymore because everybody was kind of hiding from each other.
But people are learning to live with this, and this is kind of the change that we’re seeing right here.
News Articles May Not Lead to Accurate Conclusions
And an investor reading this article would come to a conclusion: “Well, companies aren’t going to be as profitable in the future so it’s going to be problematic.”
Now, who says they’re not going to be as profitable? They’re only looking at one metric in this article, which is sales.
Now they’re missing the fact that what companies are going to do is they’re going to reduce expenses, right?
So if you were saying, “Hey, the new normal is my income isn’t going to rise as fast as I thought it was going to be. Well, maybe I don’t buy as big of a house.
“Maybe I don’t buy as nice of a car. Maybe I don’t go on as many exotic vacations.”
I back off on my expenditures.
Why? Because I want to make sure that I make it in whatever the new normal is for me.
Same thing with a company. So to come to the conclusion that this is bad is kind of silly because companies will adapt.
And it’s even if they’re not selling the products necessarily that are going to benefit from the new normal.
They’re going to do something, or whatever they’ve got to do, to get back to profitability and get back to where things are growing again.
And the other thing about the stock market is, think: Companies have to pay to use your money.
Is it riskier when you’ve got a new normal that you’ve got to adapt to?
And I would submit: yes, it is. It’s riskier.
So as an investor, what are you going to do? You are going to pay a price that is commensurate with the amount of risk that you’re actually taking on, so that your returns, that you’re handsomely rewarded for whatever risk you’re taking.
So to basically give the impression that returns will be lower in the future is actually not terribly accurate.
A More Positive Viewpoint
So let’s see, what else is in here?
Oh, how about this one? “American Consumers Are Shopping, Traveling, and Working Out Like It’s 2019”
So this is pre-pandemic, right? So 2019.
And this article is giving you totally the opposite impression on how things are going to go. Isn’t that funny?
“People have returned to their old habits in many ways”—this is the subtitle—”in many ways, while pandemic stars like hand sanitizer and stationary bikes have faded.”
Remember when everybody’s falling head over heels, they’re buying Peloton?
I remember walking into—when I could finally go back to a store, like a Target or a Walmart or something like that. I remember trying to get free weights, like dumbbells or something like that because you couldn’t get into the gym anymore.
And I remember they didn’t have any. They were all sold out.
Well, I guess that came and went, right? That problem?
Now it says, Americans—”In early 2020, many companies said the pandemic would change everything for consumers. And it did—for a while.”
But people were acting like this is the way it was going to be forever. Remember the stock market dropping like a rock?
And you know what we did here on the show is I brought everybody in: Evan, Ira, and Jonathan, and Arlene, and Anne, and Jim.
We all came together, every one of us. And we just did these shows here together, talking about how people, you guys, can get a little bit over the top regarding the sales.
And this is back in March of 2020. And you’re getting really panicky over this thing, acting like this is going to be the way life is forever.
And you forget this kind of stuff comes and goes. And of course it did come and go.
Now it says, “Now many Americans are resuming their pre-pandemic habits: rocking out at crowded concerts, doing deadlifts next to strangers at the gym.”
See, that whole thing happens to be in this article, as a matter of fact, talking about the gym and how people are going back.
“And stocking a standard supply of toilet paper.”
I mean, good grief. Remember that?
You’d be walking through a grocery store, and the person in front of you has loaded up their cart full of stuff.
I had one client that was telling me, he goes, “I can tell you what happened with the toilet paper.”
And I was like, “Okay, great.”
And it was just fascinating learning what actually caused the shortages.
You know what it was? It was interesting.
Because he said a lot of the products that we used, the paper products, he said, were made from recycled paper.
And I said, “Yeah?”
And he goes, “Well, think about it. Where did they get recycled paper?”
And I just said, “Where?”
And he said, “Offices!”
And I said, “Oh my goodness. That’s fascinating.”
Never thought about it. Offices were closed, so therefore companies didn’t have paper products that they were using to the degree that they normally did.
And then as a result of it, what ended up happening, they didn’t have paper to recycle.
I guess that’s kind of related to where people were—you look downtown at these huge cities, and they had rats everywhere.
And I was like, “Where on earth did they all come from?”
Well, they were normally well-fed from restaurants, and the restaurants were closed down. I guess that’s somehow related.
Our Perspectives Are Influenced by What We Read
But it said, “Over two million people traveled by plane each day on average between April 17 and 23, according to the Transportation Security Administration.”
And a lot of these companies, Netflix and Peloton, all these companies that were doing so great, not necessarily so much. Instacart, they slashed their valuation according to this article.
And so you would come to a completely different conclusion if you read this article, wouldn’t you?
You’d come to the conclusion that, “Okay, well you know what? Everything’s great. Everything’s coming back again.”
The prior one, it was, “No, it’s here, and it’s not that special. It’s terrible.”
And what else is in here? Oh, this is interesting.
I mean, we look at Germany, and we look at some of the troubles that they’re running to into over there because of Europe, Russia, Ukraine.
Companies Will Take Necessary Steps to Stay Profitable
Well: “VW Wants To Step Up Investment in U.S. Manufacturing”
Now who does that benefit? It benefits the U.S.
But it also benefits a German company that looks at the U.S. and goes, “Hey, you know what?”
I want to see what it says here.
It says, “Volkswagen said it’s accelerating its push into key U.S. auto markets where it expects little impact on growth from the Ukraine war or China’s COVID-19 lockdowns.”
There you go. There’s another one right there: China, and locking down and putting fences around apartment complexes so that people can’t get out.
Speechless when it comes to that kind of stuff.
But here’s the thing. Right there, that’s a whole topic in that a company will do what they’ve got to do to get back to profitability.
Even if they’re thrown a bunch of lemons, they’re going to make lemonade out of it. And that’s exactly what is going on with VW right there.
And if you look at that, they’re going, “Okay, well you know what? Europe is a little bit of a tizzy, an issue.
“We’ve got some problems: supply chain problems, food problems, energy problems, where we don’t necessarily have that in the U.S. And we can go and pull our operations out, and we can set up shop in some other country where this stuff isn’t happening.”
And that benefits a company that would be in your international portfolio, most likely.
So you look at that and go, “Wow, there’s a great example of a company adapting to circumstances.”
And it’s just looking through the headlines, and I’ll stop there.
Confirmation Bias Means We’ll See What We Want to See
But looking through the headlines, you can see why an investor would come to the conclusion that it’s a really good time to invest.
You see that whole thing with the post-pandemic, and if the picture you saw that actually goes with it is a bunch of people partying, younger people.
They’re excited. They’re having a big time.
They’re having a blast. And you go, “Wow, maybe happy days are here again.”
As the old song goes, right?
Or you may not have seen that article. And you saw the other one saying, “Things aren’t just quite as good as we thought they were going to be.”
And you may have came to the conclusion, “Hey, we’re in for a long haul. Not a good time to invest.”
And hence, whatever your mindset is, typically what happens—and we call it confirmation bias. And there’s actually a name for this psychological bias that we have as humans.
We come to the conclusion: Do I want to invest?
If I want to invest, and I want to be convinced it’s a good time to invest, I will probably miss all of the negative articles on how things are so bad right now. And then what I’ll do is I’ll see all the positive ones, and then I’ll jump in.
If I don’t want to invest, or I want to be convinced that maybe it’s not a good time, maybe that side of me is really speaking, then I would look for all the articles that say, “Hey, things aren’t so great right now.
“May want to hang on; may want to wait. Things aren’t so good.”
And we will look for information that confirms our bias, what we want to hear. And then we will act accordingly.
It’s the human condition.
We’re a tough breed to figure out because we are so driven by things that we’re not even conscious of. Just the way it works.
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