Tuning out the noise of the “All-Time High” | Erik Averill, Brandon Averill, Justin Dyer | AWM Insights #75
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Episode Summary
Everyday, thousands of investors tune into their favorite business news channels and hear pundits discuss trends in the markets. They see flashy tickers at the bottom of their screen and listen to famous people in finance give their outlook on what the future holds.
While dramatic and entertaining, most of what they listen to is erroneous. Our favorite business news channels are in business to make a profit, and the more eyeball’s they can get on the screen, the more they profit.
In this episode, Erik, Justin, and Brandon highlight why all-time highs are not as important as we think they are. They discuss how having an actual strategy is a much better predictor of investment success, and how trying to predict the future is a fool’s game.
Episode Highlights
(00:16) The news you should know: Markets are at an all-time high, the S&P 500 which is an index that captures the 500 largest companies in the U.S. is up over 100% from the low 15 months ago.
(00:52) Airbnb’s revenue is up substantially compared to where it was during the peak of the pandemic, but its stock hasn’t performed as its revenue says it should. Yet another example of the unpredictability of a stock’s performance, and why fortune-telling is a bad strategy.
(01:29) Is it a good time to invest when the market is at all-time highs?
(02:38) Stop listening to your favorite business news channels. They make money by getting eyeballs on the screen; not by being advisors. In reality, market highs are a common event.
(04:26) Just because the market is at an all-time high, doesn’t necessarily mean that stocks are too expensive to buy. If investors believe that the market will perform better in the future than performance today, then a higher price is justified, especially if companies continue to earn and profit.
(07:03) Again, our favorite business news channels are businesses themselves. They don’t have an intimate understanding of your unique situation.
(08:26) Those with a plan catered to their individual priorities win. Trying to time the market is a fool’s game.
(12:21) Focus on what you can control: managing taxes, mapping your spending, having a diverse lineup of investments, and most importantly, having a strong understanding of your priorities.
(13:33) Markets are risky. They can move up and down swiftly and dramatically. This is the price you pay to participate.
(16:13) Let’s call a spade a spade - individual stock picking is gambling.
(17:38) You have two elevators, one is attached by one cable and the other is attached by five cables. Which one do you want to be on in the event of an earthquake? Obviously, the one with five cables. In the same way, you should have a wide range of U.S. and International stocks.
Resource: Should Do It Yourselfers Invest At All-Time Highs?
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+ Read the Transcript
Erik Averill (00:00):
Hey everyone, welcome back to AWM Insights. We are your hosts; Erik, Brandon and Justin, and each week we cut through the noise of what Wall Street is selling you to bring you the knowledge, skills, and access you need to invest like a pro.
Erik Averill (00:16):
Today, we're going to tackle a topic that we are hearing a lot over the past year, especially recently. This comment that 'Hey, markets are at an all-time high; is now really the right time to invest in the public stock market?' We see that the S&P 500 is up 12 of the past 13 years, including this year, in 2021, and this includes a gain of over a hundred percent from the Corona crash lows in just 15 months. But before we jump into that topic, let's recap what's going on in the markets.
Brandon Averill (00:52):
Yeah, Erik, I think we saw Airbnb coming out with a revenue beat. Up 10% all the way from before the Corona crash back in 2019, and I think it was up 40% from 2020. So definitely leading to those gains that we're seeing across the broad market. Of course I would. Come on, man, this is the question I get on the golf course all the time, right? And then I'll put my Johnny broker hat on --
Justin Dyer (01:10):
So tell me, would you buy the stock?
Brandon Averill (01:12):
Heck yeah! Revenue's up, travel's back. Disney's doing well, we got cruises, Airbnb. Why not? Well yeah, and then unfortunately I had to go look at what the actual performance was after the revenue.
Justin Dyer (01:28):
So yeah, none of that's priced in…
Brandon Averill (01:29):
Absolutely got crushed because they came out. So, we'll pick and choose where we're out there but, you've got things like consumer sentiment plunging to the lowest since 2011, so you have these conflicting things coming out in the news, for sure kind of moving on to just broad economic stuff. We had the big, massive infrastructure bill that was passed, I think we're getting questions on that, right? 'Is this good for stocks? Is it bad for stocks?' Kind of an interesting time for sure, but what we do know is that markets are hitting all-time highs, right?
Brandon Averill (02:03):
And so, back to Erik's point here, 'Is it a good time to invest when the market's at all-time highs?' I think this is such a great question to dive into, because it's confusing for so many people. So Justin, I'll throw that back over to you. The CFA, I mean, we've had market all-time highs. I'm sitting on $4 million. What should I do? Should I sit on cash and wait for this thing to come back down? Or do I invest?
Justin Dyer (02:38):
So this is a great example where tuning out the financial media, or news in general, is probably a better thing to do, it's more healthy for you to do given these headlines. I think most people probably see those headlines and they're like 'Oh, wow, that's a unique event.' And in all reality, market highs happen all the time. I mean, I don't know exactly how many have happened this year, but it's probably north of a dozen. If you just pulled up some statistics before we jumped on here, since 1950, the market has hit an all-time high on 7.5% of all trading days. That's a pretty substantial number, think about that; what is that? 70 years, 7.5% of those trading days the market has hit an all time high. If you say, let's just say, look at how often it's been close to an all-time high within 1%?
Justin Dyer (03:32):
It's 20% of trading days; that's one out of every five days, it's hitting an all-time high. And then, most importantly, let's look at the numbers around all this. And if you could do a back test study and say 'Let's invest every time the market hits an all-time high', and guess what? You actually outperform investing on any other day. It's totally counterintuitive. This is over a one-, three-, and five-year period, looking from 1988 through the present day, through 2020. And it's really counterintuitive because emotionally, behaviorally, we want to say 'Okay, let's wait for the market to correct, and let's wait for it to pull back', but, in reality, you just can't time those things. And it's incredibly tough, it really is.
Erik Averill (04:26):
Justin, a question I wanted to ask you that I think will be helpful for our listeners is, a lot of times, I think we have these like knee-jerk questions because of what the financial media tells us we should be asking, like, 'Why does it matter if it is at an all-time high?' What would be the argument on the backside of why it would be a bad time invest? What creates all-time highs? Does it mean things are too expensive? If we went to the nuts and the bolts of what risk of all-time high is, what does that actually even mean?
Justin Dyer (04:57):
Well, I think the lens that we interpret it through the news media is 'Oh wait, the market's too expensive, I don't want to participate'. But if you take a step back, markets are hitting all-time highs because of positive news, because of, you know, you could argue right now, the earning season we just essentially wrapped up has been incredibly strong and markets are reacting to that. Now, in all reality, markets are incredibly complicated machines or ecosystems that are taking into account so many different variables. Is it the infrastructure bill that was just passed? Is it the jobs situation? And the media will try and distill these down or dumb these down into 'Oh, the market is up because of X'. In reality, it's just way more complicated than that, but in general, the markets are up and at all-time highs because the data is supporting it; investors generally have a favorable outlook going forward, they think companies are going to continue to earn more and more revenue, profits are going to increase. And so they're willing to pay more for a company, right?
Brandon Averill (06:14):
I think that's a really good point, Justin. And to be clear for everybody, I need to say this early in the podcast, in case people stop listening, but we were not recommending Airbnb, it has been misinterpreted before. I just want to be really clear that we are not Johnny stockbroker. We are not going to try to predict the future and pull out our crystal ball, I probably have one hanging around here somewhere. But no, I think it's a really good point too, when you're looking at the media and you're looking at where your sources are coming from, remember the incentives. What are the incentives, right? It's boring, right? We have to hype up this topic, right? Stay invested, get invested. Don't do anything, right? That's a boring approach in a lot of people's mind, unless you like making money, then it's pretty exciting.
Brandon Averill (07:03):
But if you ultimately want to drive ad revenue, if you want people to click, if you want people to be around, then it's all about 'What's the hot topic?' It's going up, it's going down, Jim Cramer, slapping his button, there's no incentive for him. He doesn't care; all he cares about is whether Mercedes or BMW are going to put an ad on his commercial, right? And he drives up his... Yeah, you tune in and you watch. So I think, again, take yourself out of it. And it's tough, right? The media we're in an right, that we all know social media is bad for us. We all know that, yet we all check our phone how many times a day? We were just having this conversation with a client.
Brandon Averill (07:46):
So, I think at the end of the day, it's going back to the fundamentals and back to the evidence, Justin, the stuff you were talking about, I mean, to know that 'Hey, even if I invest at all-time highs, if I'm willing to be a long-term investor', right? Long-term investing being 1, 3, 5, 10, 15 years. 'This is going to be a good outcome for me'. Trying to figure out when to get in, when to get out, even in the broadest sense, we're talking about being broadly diversified, but trying to figure out when to get an - it's a fool's game, right?
Justin Dyer (08:26):
Well, yeah. And when to get in, when to get out, it's critical. So right now, we're sitting in all-time highs, and I can relate to that. Some of the valuations you see, you'll scratch your head you're like 'Wait, this thing is trading at X times sales? It's not even multiple of earnings' in some cases. Totally understand that- you have to ask yourself 'Well, if that's the game I'm going to play, I'm going to ignore the evidence, the broad evidence, and I'm going to play this game. It's too expensive. Markets are at all-time highs, I'm not going to get invested right now. When am I going to get invested?' What's your plan to get invested? And I can tell you from personal and professional experience, if you don't have a plan, it's going to be way harder to make a decision when the markets are correcting or down 10, 20, maybe 30% in some cases, and pulling that trigger to say, 'Now's the time to get in', incredibly difficult emotionally and arguably even way harder than, than the conversation we're having right now. That's point number one I want to make.
Justin Dyer (09:27):
And then, number two, let's take this back to the boring topic like Brandon just said, but your financial structure. I mean, why are you investing in the first place? If you identify your priorities, if you identify what your financial structure looks like, does your financial structure align with your priorities? Do you have enough short-term safe, conservative assets to cover any short-term needs? Ask yourself those questions, talk with one of our team members and figure out where you stand, and then that should help you answer this question far easier than just 'Well, markets are at all-time highs. I shouldn't invest right now'.
Erik Averill (10:09):
And I think taking that zoom out approach that you guys are talking about of 'Turn off the media for a second and just start to ask some basic questions', why is it that we feel different about in the real estate market? People will say things are really, really expensive, right? Since COVID hit, but real estate is always going to be more valuable. Well, maybe, and maybe not. But if you take that same logic to sometimes I think the stock market, once again, is just a location where you happen to buy ownership in companies. So the stock market, yes, in aggregate is a trend of what's going on of the underlying 10,000 plus individual companies that are in there, you have to take a step back and say 'Hey, do I think companies are going to continue to produce goods and services that people are going to buy, and that they are smart enough and have well enough run organizations that they're going to produce profits?
Erik Averill (11:09):
'Do I believe in capitalism?' Right? If the answer is yes, you want to participate in those gains, and I think of the analogy we see in the sports world of there's argument what we just saw at the trade deadline and major league baseball, the Los Angeles Dodgers already a massive payroll, goes out and gets even more expensive players. And there's this premise of 'Aren't you buying really high?' Well, the economics of running the Los Angeles Dodgers, that payroll looks big, but I promise you those CFOs and those investors are looking at it and being like 'We're going to produce bigger profits year over year because we believe in the product that we're putting on the field year over year, to create advertising and revenue'.
Erik Averill (11:55):
And I think it's just important to go back to that financial structure. What we're not saying is that if you need your money in the next three months, that you should take that risk to the capital markets. But this is the most evidence-based, research-backed to way to grow your wealth is participating in the public stock market is you're participating in the growth of these companies over decades.
Justin Dyer (12:21):
Experience, right? Like over time, as you just mentioned, capital markets have rewarded investors who have taken that long-term approach and remain disciplined with all the noise that's going on in the short-term. And then by focusing on, we didn't even to hit on this, but by focusing on the things we actually can't control, make sure you actually have the right asset allocation, the right mix of stocks and bonds, enough international, enough domestic, you're diversified. Then you manage expenses, you manage taxes, which everybody knows that listens to this, we hit on so often.
Justin Dyer (12:59):
If you can do all those, then you're going to position yourself to make the absolute most of what the capital markets have to offer. And so, it's going back to the fundamentals; don't try to get too cute, we all know that it's an efficient market. Go back to the evidence. You're not smarter than the next Joe down the street. We all have the same information, just take it back to the basics and you're going to have really good outcomes.
Brandon Averill (13:33):
And let me just underscore too, I think a really important point is that risk is real too, right? What we're not saying is 'Hey, the markets aren't going to correct tomorrow, or next week, or six months from now'. They very well could actually, it's been an extended period of time in the market over the last, let's call it year to date, where there hasn't been a greater than five or 10% correction. I don't know the exact statistic, but markets have risk inherent in them. Risk generally, is markets going up and down? We call it volatility. It is expected that that will happen at some point in the future; it's not dependent on whether or not you're hitting a high today or tomorrow, but I want to underscore that. That's inherent in participating in the capital markets and being rewarded over the long-term, you're going to have short-term fluctuations and that's just a part of reality.
Erik Averill (14:32):
And here's something interesting that I'd love for you guys to hit on. Brandon, you brought up this point that, here at AWM this is what the evidence says, right? This is the best way to invest, not based off of our opinion, right? All of the academic research says that you should be globally diversified, that there are certain factors that, over time, can produce higher returns. But what we know unequivocally is picking individual stocks is absolutely absurd, but what do you see in every Wall Street portfolio, right? It's the famous 30 names, the famous 10 names. Every time we get a new client that's coming over from Merrill, or Morgan, or UBS, or Wells Fargo, the famous names: Apple, Microsoft, Amazon, Google, Facebook. And here's the thing, those are the overvalued stocks, right?
Erik Averill (15:24):
You're not even giving yourself an ability as an investor if you're not globally diversified to buy the stocks that are reasonably valued, that have the ability to make huge gains over the long-term. And it's not to say that those famous names won't continue to make money, but when you remove the top 10 names of the S&P 500 and you look at the other 490 names just in the United States, they're actually very reasonably priced from a historic standpoint. Yet, if you have just a bunch of individual stocks in your portfolio, and they're just the famous names, that is an absolute sign that you have an amateur broker, who's literally setting you up to lose out on the massive opportunity that all the academic research says that everybody deserves.
Justin Dyer (16:13):
Yeah, totally. I think there's so much confirmation bias in that. It's really easy. I was on a call yesterday and this is a guy that's been a client for a long time, and it's still the same. At least he phrased it right. 'Hey, I want to gamble with a little bit of money. Can we go buy Amazon?' At least you got it right, you're gambling.
Justin Dyer (16:33):
I think at the end of the day, that's what that is. It's, again, a sales pitch. We don't need to even get into the nuances, but when you see a portfolio bill like that, all the inherent costs, the bid-ask spreads, all the things that could be going into under-performance and you don't even realize it, but it's a heck of a lot easier to sell that's for sure.
Justin Dyer (16:55):
So, theoretically again, think about that. Think about the inherent, just the business model if you want to over time, why do those portfolios exist? Why does somebody want you to dial dollar cost average? It probably stems all the way back to when brokers used to make money off every transaction. 'I'm not going to have you put all your money in today, that's insane. I'm going to spread this out, so I get my commission over time'. I think there's so many things that are finally being corrected in our world, but you know, you have to go back to those incentives.
Brandon Averill (17:38):
Erik, you touched on global diversification. I think that's really important, and your highlight of how the other 490 or 95 stocks in the S&P 500 are arguably more favorably priced than the top five. Well, other markets around the world, you can say the exact same thing for. Emerging markets are pretty attractive from a valuation standpoint. International developed markets, same idea relative to the United States. Now I'm not saying that you shouldn't own the United States as a result of that, but we're saying be globally diversified. Don't try and time when something is overvalued and undervalued.
Justin Dyer (18:15):
So international thrall or money It's all about neo, baby. Just kidding, folks. Disclosure. We do some portfolios may hold me. Not all.
Erik Averill (18:39):
Well we better end this podcast before Brandon goes into Johnny broker and starts exposing all of the interesting sales pitches that we're helping our clients fend off. But I think in that context, the one thing I would say to our audience as we sign off is the reason you've been so successful in what you're doing, and so many of you listening are the best in the world at what you do, it's because you've taken a divergent path from the crowds. You have outperformed and become the best in the world because you didn't believe in herd mentality. You actually said 'Hey, what is the pathway to success?' That this is very usually slow. It's difficult, right? It takes sacrifice. But the reward at the end, if you're willing to stay the course and do things that the average majority is not, you are going to be rewarded.
Erik Averill (19:35):
So while everybody else is playing fantasy football, you're actually playing on Sundays. When everybody else is gambling and playing fantasy baseball, you're the one who's suiting up and running onto the field and in a major league stadium. And so it's the same thing when it comes to being a professional with your wealth and with your investments is trust the academic research, not somebody's ill-advised, conflict-free adverse, conflict-filled advice who doesn't have the right incentives, trust the expertise, know what your financial structure is, and capture the returns you deserve. And so you can access all these notes over at awminsights.com and until next time, own your wealth, make an impact, and always be a pro.