Don't Worry, We Still Like (Some) Stocks

Jason’s Random Words

I live pretty far north, and the signs of autumn are all around. The leaves have all turned, and within the next few weeks, most of them will be on the ground. While we haven't yet had a frost, the weather has turned cold, and it's dark by 6:30 (and we lose a few more minutes of daylight every day). Pretty soon, winter will be upon us.

Frankly, it reminds me a little bit of the stock market lately. After heating up during the summer – The S&P 500 was up almost 20% year-to-date on August 1 while the Nasdaq 100 was up a remarkable 44% – both have cooled off substantially since then, down about 7%. That puts us back in "correction" territory, with both indices down about 12% from all-time highs.

The point? Unlike other recent stock market selloffs, this just doesn't feel like a "hot" time to be buying stocks to me. It feels like the beginning of winter.

But if you listened to this week's podcast episode, you probably aren't surprised that I feel that way.

So besides warning everyone who will listen to me that I expect the stock market will underperform over the next several years, what am I doing?

I'm looking for opportunities.

Because as much as I do think we are likely to see below-average returns for the broad market indices, I also think there will be – and that there already are – wonderful opportunities to buy individual stocks that will not only make money but generate above-average returns in the years to come.

This is one of the reasons why I will keep picking individual stocks, instead of investing in index funds. Everyone – except value investors – benefited greatly from the cheap money of the past dozen years, but I think the investors who do the best over the next dozen years will be the ones picking individual stocks (maybe even value investors). But it's going to take a lot more acumen to be successful this time around. Easy, cheap money isn't there to fuel anyone's good (and bad) ideas. Money just costs too much, and it's no longer so easy to get.

What else am I doing? I think I am about to get a lot choosier. Companies that can't live off of their own cash flows and balance sheets will have a much higher bar to clear to remain in my portfolio. Industries that have historically used a lot of debt like real estate will get more benefit of the doubt, but cash-burning growth companies won't. This is a big adjustment for me; I own more than my share of these companies, and many of them will probably be shown the door in short order.

On the other hand, there are more overlooked, high-return businesses out there, trading for reasonable valuations, than people realize. They don't get nearly the airtime on CNBC, or coverage from Wall Street's finest. But they make money, and their managers don't do stupid things with that money.

Maybe that's what I'll call my new portfolio: The Don't Do Stupid portfolio. Maybe I can just ask Jeff what he's buying next, and buy the exact opposite.

Jason

Jeff’s Random Words

One of the things I’ve struggled with as I’ve learned about investing is how much to pay attention to the macroeconomic environment and news. Inflation, interest rates, possible recessions, etc. It’s all stuff we have no control over and I worry we can overthink it. I think differently about this now than I used to.

I bought my first individual stock in February of 2020. So in just under 4 years as an “individual stock investor”, I’ve seen many “macro” things that have certainly impacted my portfolio. And yet, my initial view of all that news was “meh, imma ignore all this and buy my stocks”. I still kinda think that’s largely right, but not entirely. In fact, that was the whole point of this week’s episode. But I do think investors can spend too much time worrying about the larger economy. I think investors can try to make too many decisions or make too many predictions, about things that are still largely out of their control. I’m not sure there’s any macroeconomic news that should completely change anyone’s investing strategy. My sense is that moderate tweaks are a smarter strategy.

Don’t get me wrong, everything we discussed in this week’s episode I believe is important to consider. But even still, we don’t know interest rates won’t go back to zero or near zero. I would say it’s highly unlikely, but you never know. So I’m hesitant to make a complete change to my investing philosophy even when the overwhelming consensus is saying the same thing. There’s just too much uncertainty in life.

But that’s not my point. I’m proceeding under the assumption that we see interest rates near where they are now for the foreseeable future. And I might think about seeking yield with bonds, T-Bills, or cash. But I’m still going to be buying stocks. I’ll likely be more careful about where I make my higher-risk bets, but I still believe stock investing is my best path to my financial goals. I’m going to keep contributing to my retirement account (all index funds) and I’m going to keep buying individual stocks. But I’m also going to keep learning, talking to other investors (not Jason), and considering the macro environment. Maybe in another 4 years, I’ll have a different view. That’s what makes this fun.

Jeff