What Did We Learn From a Volatile Market Week? - 7investing 7investing
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What Did We Learn From a Volatile Market Week?

It was a bit of a roller coaster.

September 27, 2021

When the stock market drops by a meaningful amount (usually losses measured in the hundreds of points) people look for a reason. When that happened recently, the media talked about China’s Evergrande, political uncertainty, and inflation risks as well as a handful of other possible causes.

On Monday, Sept. 20 and Tuesday, Sept, 21, stocks were sharply down and we heard all the normal talk about bubbles bursting, crashes, and all sort of other scary things. In reality, the losses of the early part of the week were made up on Wednesday and Thursday with the the Dow and the Nasdaq finishing up for the week.

That type of short-term volatility means nothing when you invest in excellent companies for the long term but that does not make the down part of the ride any less scary as it happens. Drops like we saw during that two-day period, however, actually create buying opportunities. In addition, the quick “recovery” shows the folly of using stop-loss orders as a way to make sure you lock in gains under the idea that you can just buy back at a lower price. That’s not always how it goes as many market dips are very short-lived and using a stop-loss won’t prevent you from losing money, it will actually prevent you from making money when shares go back up.

Simon Erickson joined Dan Kline for the Sept. 24 edition of “7investing Now” where we looked at the volatile week, explained what it meant, and answered a number of your questions.

A full transcript follows the video.

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Dan Kline: But let’s move into the homestretch here because I don’t know if any of you noticed, but this was a high news week on the stock market. And one of the things I like to do is say, like, hey, when things are scary, we’re going to hold your hand. And this is what I asked on Twitter today. And I asked the whole team, what lessons can we take away from this down and up week in the stock market, I say down and up instead of up and down, because it went down first, and then it went up. And I have no idea where the market is now it was flat when we started but if you told me it was down 400 or up 400. I would not in any way think you were lying to me. But Simon, you actually responded right away with pretty much what I said and sort of, and that’s Don’t overreact to headlines. Do you care to expound a little bit here?

Simon Erickson  37:26  Yeah, I mean, to me, the story of the week, this week was really all about China. And you know, its real estate developers being $300 billion in debt. And I think that the headlines really frame this as though this happened last week, and that China’s economy was about to collapse, just like the recession that we well, I shouldn’t say collapse, but the challenges we faced in 2008, with our own great recession in the United States. Certainly it is a concern, Dan, I just think that it was a bit of an overreaction. Because this has been something that’s been ongoing for a decade, China is certainly aware that it’s got ghost cities that it’s developing, and it’s going to have to grow into those but I don’t think that that this just blows up this week. And we saw a lot of volatility in the market because of a lot of those stories.

Dan Kline  38:10 Yeah, ghost cities are not as cool as you’d think they were. I always pictured like a Scooby Doo episode, but it’s really just full cities that they don’t have a population ready to go in. And I agree, we’ve lived in – for many years we’ve been a hair-trigger where like some rumor comes out that something that won’t actually matter that much in the economy might happen and the market goes up 1000 or down 1000 It’s a lot of overreaction, but I think some of that is just powered by how easy it is to make a trade right now. Like you don’t have to call a broker you don’t have to pay a fee and the one thing I’ll caution you on this is ne very careful if you’re trying to time the market. We talked about this on Wednesday’s show if you think wow I’ll sell out of this stock in order to buy back in later.

Historically that generally does not work out for you. Let’s go to Joe Mooney’s comment a lot of you commented but we just cherry-picked some of them so JT if you want to bring that up it would appreciate it. There’s always a vocal minority calling for a crash. I joke about this go on CNBC talking that there’s going to be a crash and eventually you’re the guy who predicted the crash so I’m in your thoughts here.

Simon Erickson  39:15 Yeah, it’s interesting. I mean, like, like we just said, you know, the crash is a big word. I will say that there are a lot of institutional investors that are taking money off the table in China right now. You see a lot of them say – SoftBank saying hey, we don’t know what’s going on over there with regulations. I mean, they’re not investing in China with new positions right now. A lot of other American institutional investors doing the same thing. So there is impacts and stuff like that. That puts a lot of pressure on prices, Dan?

Dan Kline  39:38 Yeah, absolutely. We’re gonna take two comments from our own. First Maxx Chatsco go in the live chat if you want to take that one JT. Dan nailed it on Monday. I’m gonna toot my own horn a little bit. That doesn’t happen that often on Monday show by saying that the markets would probably bounce back in a few days. I took the opposite view, but now I own some Arby’s. We are not going to Arby’s. Yeah, that’s like losing a bet not winning a bet. That being said, I wasn’t basing that based on any market knowledge. I was basing that on what the pandemic has been like when we’ve had these very quick call them crashes and corrections, because you really have to look and we go back to 2008 when the market crashed, and there was a fundamental underlying economic reason, it wasn’t just noise. So just because someone comes out and says, Hey, if we have a government shutdown, it’s gonna mean irreparable harm to the American people history has shown that’s not true.

We’ve had government shutdowns. So you actually have to not just have a supposition, you have to have a real reason or else some minor good news will tick things back up so again, I don’t want to downplay how sort of frightening these things can be.

But remember that markets respond to news and news isn’t always responsible. News doesn’t always – we saw this whole wave of Evergrande stories, we covered Evergrande on Monday and Wednesday shows there are some some some free articles on  7investing calm about this pulled from those shows. Were on Monday the psycho is Evergrande to the end of the world, it’s gonna crash it’s gonna pull down all these markets. And then Tuesday there was as we were preparing Wednesday show there were a whole bunch of Wait, maybe Evergreen, it’s not that bad. And if it fails, wait a minute. It’s not just a financial Institute. It actually owns all this stuff. So like when you own a bunch of stuff, like maybe people get 90 cents on the dollar, but they don’t get zero but I wanted you to comment Simon on, on Matt Cochrane’s comment here. This was on Twitter as well. If you want to share it, JT, keep calm and carry on. And if this week scared, you stop checking your portfolio.

Simon Erickson  41:40 Yeah, I mean, how about that? How do I take that the angle I guess I can put on that as a 90% of the market’s trading is done algorithmically right now. Right? How is anybody still doing day trading? Because you’re gonna lose. The AI has got a lot more information, a lot more data points about what’s going to happen in the next five seconds of this stock or the next five minutes or the next you know, day. This is a very challenging game to play. And so when you worry about the market being up this many points on a certain day, but then it comes back down the next day. It’s kind of those inner days, do they really matter? Do we really care if we’re investing money in the stock market for the next five years? I don’t, I don’t, I don’t care if the market is up one day and down the next if you’re if you’re a high-speed trader or a day trader that’s really interested in those intraday swings. You care about that stuff as a long-term investor it doesn’t bother me.

Dan Kline  42:27 That sounds exhausting. That sounds like betting on baseball pitch by pitch like, like, this one’s gonna be a strike to the outside. Like, I don’t want to do that, no matter how good I think I am at predicting baseball or predicting stocks. We’ve seen the markets not great at interpreting results. We talked about this a lot with retail, we’re like, companies are way bigger than they were two years ago. But they didn’t grow as much as they did during the pandemic, because the market conditions changed. And the market goes ugh, this company is it’s like well, but they still had what would have been amazing comp growth on top of really good numbers. The market sorts that out eventually, it doesn’t sort that out in the short term. If you have any last questions and comments, feel free to get them in. But we’re gonna take one more from Mark Simon. And he says volatility is not risk, but rather the typical trend of long-term significant rewards. Amen. Simon.

Simon Erickson  43:21 Yeah, volatility versus a great discussion. volatility is movements that are shorter term, the ups and downs of stock prices, if you want to call it that risk, is the permanent impairment of capital, are you permanently gonna lose your money from this? A lot of times you kind of hear these sayings buy low, sell high, you know, and stop losses to only lock in a 10% gain. That’s all related to volatility. But risk is really more of you know, longer term. Is this company getting displaced by its competitors? Is it it? Is it stepping on landmines in the country where it operates? I mean, that’s the stuff we should be really considering, as long as we’re looking a couple of years out instead of a couple of minutes.

Dan Kline  43:54 Yeah, absolutely. I’ve talked a lot about how stop losses can often sell you out of a great company. And then when you go to buy back in, it’s actually higher than where you were. Glen Cramer says down markets are opportunities to invest. Thank you for that. Glen is a very regular viewer of the program and a supporter. So we really, really appreciate that.

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