Why Does the Stock Market Go Up?

00:00:00.000 | Welcome back to Portfolio Rescue, our show where we take questions straight from the

00:00:20.080 | audience.

00:00:21.080 | Askthecompoundshow@gmail.com is the email.

00:00:23.920 | Duncan, last week, I laid it out in the field and I talked about my daycare expenses.

00:00:28.880 | We have an international audience here for the show.

00:00:32.340 | Had some people chiming in from Germany saying I pay $100 a month, just sort of rubbing salt

00:00:36.640 | in the wounds.

00:00:37.640 | Someone from Sweden said they pay $1,000 a year for child care.

00:00:41.560 | That's great.

00:00:42.560 | Thanks everyone for sharing.

00:00:43.560 | Makes me feel even worse about it.

00:00:46.360 | I thought you were going to say the opposite, because I did see a couple of people say that

00:00:49.200 | they actually spent a whole lot themselves, so I thought maybe you got some consolation.

00:00:54.480 | Yeah, but people around the globe, they sort of have a speed, I guess.

00:00:58.360 | Maybe they're paying it, making up for it in taxes.

00:01:00.560 | So anyway, a lot going on in the market.

00:01:03.080 | I was going to do a little intro here about the correction and going on, but we have some

00:01:06.560 | questions about that, so we're going to get into it, so let's just get right into it.

00:01:10.640 | Okay.

00:01:11.640 | So first up, I have about $69,000 left of my original student loan of $110,000.

00:01:19.320 | The interest on the loan is 2.95 and the monthly payment is approximately $750.

00:01:25.280 | At that rate, I have 105 more payments.

00:01:27.960 | For the past two years, I've been paying an additional $500 a month, which decreases the

00:01:32.080 | payments from 105 to 60.

00:01:35.520 | I hate having debt over my head, but I know that this is not the best use of the $500

00:01:39.680 | and it could be more advantageous to invest it long term.

00:01:43.080 | Even when I do basic calculations with very conservative annual returns, it seems like

00:01:46.640 | investing is the right answer.

00:01:48.280 | I know you've covered this topic ad nauseum, but I'm hoping that you can piece together

00:01:51.960 | some charts or data that would give me the final push to commit.

00:01:55.600 | Okay.

00:01:57.720 | Let's spreadsheet this thing, okay?

00:01:59.200 | So you're paying an extra $500 a month for five years.

00:02:02.280 | That would mean you're forgoing $6,000 a year of saving over that five years, 30K total,

00:02:08.280 | right?

00:02:09.280 | Because you could pay it off in five years.

00:02:11.000 | Let's assume, you know, an 8% annual return in the stock market, and unfortunately that's

00:02:14.960 | not usually a realistic comparison because the stock market doesn't give you the same

00:02:18.880 | return year in and year out, right?

00:02:20.400 | Like it's not a retirement calculator.

00:02:22.240 | But if it was, an extra five years of compounding, especially for a young person, that could

00:02:26.920 | be worth close to $60,000 over 10 years, $120,000 after 20 years, and $260,000 after 30 years,

00:02:33.760 | assuming an 8% annual return, right?

00:02:35.680 | So that five years of compounding is big.

00:02:38.080 | I mean, simplifying things here, you don't even have to take it to the spreadsheet.

00:02:41.840 | 3% basically is your hurdle rate, right?

00:02:44.860 | Can you earn higher rates of return in the financial markets than 3%?

00:02:48.760 | I hope so.

00:02:49.760 | If you can't, that's not great.

00:02:52.200 | But it's not the case over every five-year period that you're going to do great.

00:02:54.360 | So over the past hundred years or so, the U.S. stock market has been positive in 88%

00:02:59.160 | of all rolling five-year periods.

00:03:02.380 | But actually, if you're going to take that $500 instead of paying down the debt and invest

00:03:06.560 | it, you probably want the market returns to be lower over that five-year period because

00:03:09.960 | that means you're buying at lower prices for longer, right?

00:03:13.720 | You're --

00:03:14.720 | It's foreshadowing for an upcoming question.

00:03:16.440 | Yeah.

00:03:17.440 | I think another way to think about this, if you're one of these people that just wants

00:03:21.000 | to pay the debt off, let's say you keep paying that extra $500 a month for your debt, pay

00:03:25.280 | it off faster.

00:03:26.280 | So after that five years, you now have $1,250 a month to save, right?

00:03:30.400 | Because you have the $750, which is the original payment, and the extra $500.

00:03:34.040 | And now almost four years sooner, you can start putting that money to work and saving

00:03:37.600 | and investing.

00:03:38.880 | I guess having said all this, like, maybe you don't want the spreadsheet answer.

00:03:42.680 | Maybe you just want to pay it off.

00:03:43.680 | And guess what?

00:03:44.680 | That's fine, too, right?

00:03:45.680 | It doesn't really matter.

00:03:46.680 | So I think the calculus is pretty easy.

00:03:48.340 | Can you earn high returns, and can you allow your money to compound faster?

00:03:52.060 | So I had some student loans.

00:03:53.660 | I think my interest -- I had some deal where if I paid them off a certain amount of months

00:03:59.400 | in a row, like 15 months in a row when I started, it got lowered.

00:04:02.300 | So I think my final rate was like 2.25%.

00:04:06.540 | Michael would say that's like two and a quarter.

00:04:08.460 | Yeah.

00:04:09.460 | Two and a quarter.

00:04:10.460 | So I didn't see any need, even if I could, to pay it off earlier.

00:04:14.060 | Like, especially in an -- I think maybe in a higher inflationary environment where that

00:04:17.780 | debt is being slowly inflated away, it makes sense.

00:04:21.500 | But again, some people's brains don't work that way.

00:04:24.460 | So if you want to make it easy on your brain, and you really hate that debt, but you also

00:04:27.940 | understand like I'm giving up and compounding here, and inflation is good for debt because

00:04:31.980 | it inflates my payments, pay an extra 250 a month and then invest the other 250.

00:04:36.860 | Like, split it in two, right?

00:04:38.660 | Because there's no right or wrong reason here, or right or wrong answer here, right?

00:04:42.980 | It's just -- it's kind of what you want it to be.

00:04:45.620 | You probably -- this person knows the spreadsheet answer.

00:04:47.660 | They know what it is.

00:04:48.660 | They can't bring themselves to do it.

00:04:49.660 | I don't know.

00:04:50.880 | Cut the baby in half.

00:04:51.880 | Cut the baby in half.

00:04:52.880 | What do you think?

00:04:53.880 | Yeah.

00:04:54.880 | No, I mean, this is one that we get a lot of questions about, you know, all the time

00:04:58.660 | because, yeah, some people -- this person even said it's their personality, they hate

00:05:01.660 | debt.

00:05:02.660 | And so some people, you know, have that like Dave Ramsey type mentality that debt is evil

00:05:06.180 | and they have to get rid of it as soon as possible.

00:05:08.340 | And then other people are like, yeah, why would I pay it off any faster than I have

00:05:12.340 | to, you know, especially if the rate's low?

00:05:15.060 | It seems so personal to most people.

00:05:16.460 | >> I also think my relationship with debt has changed where rates got so, so low that

00:05:21.820 | I think that changed the calculus for me, and especially with inflation being higher,

00:05:24.940 | that made me rethink the repayments.

00:05:26.540 | But again, for some people, they don't care about that spreadsheet answer.

00:05:30.060 | It's just let it -- and again, if this person does pay it off four years early, they can

00:05:34.660 | immediately take that money and then start saving it then.

00:05:37.620 | So either way, this person is -- if they're paying extra, they're probably going to do

00:05:40.260 | fine either way because they're putting some extra money in.

00:05:43.180 | >> What are your thoughts on -- I know this is a hot topic right now because of how long

00:05:46.980 | the payments have been suspended for federal student loans.

00:05:51.860 | Should people be paying during this entire time, or is that silly considering they're

00:05:56.300 | not accruing interest during this time?

00:05:58.660 | Do you have any thoughts on that?

00:06:00.340 | >> The interest just kind of gets pushed to the end, right?

00:06:01.900 | It gets kind of pushed to the end, or -- I mean, I guess as a young person, you want

00:06:07.740 | to spend -- you're going to need that money more when you're young than when you're older.

00:06:11.220 | So yeah, I guess if the government is giving you a freebie here, it probably makes sense

00:06:15.420 | again, unless you really want to get rid of it.

00:06:17.500 | But yeah, I see no problem with delaying it, especially if it helps you in other ways,

00:06:20.740 | especially with inflation being so high.

00:06:22.500 | >> Right.

00:06:23.500 | >> All right.

00:06:24.500 | Let's do another one.

00:06:25.500 | >> Okay.

00:06:26.500 | So up next -- and that question was from Colin.

00:06:28.660 | So up next we have, as the NASDAQ has had a rough start to 2022 and high multiple names

00:06:33.700 | have been crushed, and the street view seems to be that Cathie Wood stocks are essentially

00:06:38.140 | going to keep crashing with rates and inflation being what they are, I wanted to see if there

00:06:41.980 | was a contrarian take.

00:06:43.720 | If one has a five-year or 10-year horizon, would these innovation technology plays not

00:06:47.980 | be the perfect companies to have in a portfolio?

00:06:50.940 | Should one not be slowly buying into these names as the prices keep dropping?

00:06:54.620 | >> All right.

00:06:55.980 | Let's put a little meat on the bones here.

00:06:57.620 | The NASDAQ composite is down like 20%, bear market basically.

00:07:01.660 | But there's more than 4,700 stocks in this exchange.

00:07:05.140 | Over 60% of them are down 20% or more.

00:07:07.620 | More than 40% of them are down 40% or more.

00:07:10.060 | And almost a third of them are down 60% or worse.

00:07:13.140 | Like there is some serious carnage out there.

00:07:17.020 | There is someone who I've looked at before and does a lot of writing on this topic that

00:07:21.540 | talks about a lot of these innovation names.

00:07:23.220 | So we're going to bring in a new guest here, Brian Faraldi from The Motley Fool, a new

00:07:27.660 | author.

00:07:28.660 | We're going to talk about his book in a little bit.

00:07:29.660 | Brian, I've seen you write about a lot of these companies, Tesla and Shopify and some

00:07:33.740 | of these other more innovative companies.

00:07:37.260 | What do you think about the question here that our person is at least trying to have

00:07:39.740 | a long-term time horizon and not think I'm going to make all my money back in three months?

00:07:43.920 | A lot of these stocks, really well-known name brand stocks are down 60%, 70%, 80%.

00:07:50.060 | What are your thoughts here about like picking through the rubble?

00:07:52.140 | >> Yeah, it's been trying times to say the least.

00:07:55.620 | I mean, if you rewind the clock to 2020, it was like Cathie Wood could do no wrong and

00:07:59.980 | over the last 18 months, it feels like she can do no right.

00:08:05.500 | And in truth, I like this question.

00:08:09.860 | The questioner is saying, shouldn't we be digging through these companies, digging through

00:08:12.660 | this carnage?

00:08:13.660 | And if you have a long-term time horizon, wouldn't now be a good time to start easing

00:08:17.140 | into these companies?

00:08:18.140 | I can tell you that's what I've personally been doing with my capital.

00:08:22.260 | And if you're going to buy individual stocks or especially high-growth ones like the one

00:08:26.900 | the questioner is talking about here, you really need to have a multi-year time horizon

00:08:32.900 | in mind with each of these stocks.

00:08:35.260 | If you look back at any of like the best performing stocks over any long period of time, 10 years,

00:08:40.260 | 20 years, 30 years, you get companies like Apple, like Amazon, like Netflix, et cetera.

00:08:46.020 | And without exception, every single one of them has gone through periods like this where

00:08:50.020 | they just fall hugely peak to trough.

00:08:52.620 | And this actually happens on a regular basis.

00:08:55.620 | The tricky part about that is so do all the worst stocks over that long period of time.

00:09:00.540 | They also fall peak to trough huge.

00:09:03.140 | And it's really tricky in real time to figure out, well, is this just a temporary downturn

00:09:08.340 | or is something more long-term impaired?

00:09:12.020 | How do you think about the psychology between you own a stock that's down 50% or 60%?

00:09:16.380 | You've held it because you're a buy and hold investor and you have to think, I'm either

00:09:20.100 | going to put more money in or I'm going to cut bait and put my money somewhere else versus

00:09:23.620 | buying a new stock where you see it's down 80% and you go, I'm going to take a flyer

00:09:26.620 | on this one.

00:09:27.620 | How does the psychology of holding it change?

00:09:29.540 | Because at that stage, a lot of people have this mentality of I'm going to wait until

00:09:33.420 | it breaks even or I can't let go now because I'm selling, well, it's down.

00:09:37.420 | How do you think about that calculus?

00:09:38.820 | Yeah, that's a really hard question to answer.

00:09:41.380 | And every company is unique in that respect.

00:09:44.900 | Personally, what I always try and do is I always go back to the most recent earnings

00:09:49.220 | report, the most recent conference call, and what I'm trying to ask myself here is, is

00:09:53.460 | this a broken stock?

00:09:55.320 | Is valuation the problem?

00:09:56.540 | Is sentiment the problem?

00:09:57.780 | Or is this a broken business?

00:10:00.340 | Is there something fundamentally wrong with the business or my assumptions about the company

00:10:05.020 | moving forward?

00:10:06.860 | That chart you just showed is great because if you look at companies like, say, Shopify

00:10:12.180 | and Zoom, those businesses are still growing.

00:10:15.060 | They're still growing quite nicely.

00:10:17.220 | Teladoc is too.

00:10:18.700 | I think Netflix is a bit of a different scenario because they reported a year-over-year decline

00:10:22.940 | in number of subscribers.

00:10:23.940 | And the real hard question you have to ask yourself right now is, is that a temporary

00:10:28.020 | thing?

00:10:29.020 | Is that something that they can work through?

00:10:31.180 | Or have they reached peak subscribers?

00:10:33.100 | And is the growth here going to be low single digits moving forward or even potentially

00:10:37.820 | negative given the ability to switch back and forth between these things?

00:10:40.900 | This is why investing is hard.

00:10:42.100 | Lewis: Yeah.

00:10:43.100 | You talked about doing some homework on these companies, too.

00:10:44.740 | I think the hard part for a lot of people is, what is the right multiple for a growth

00:10:49.860 | stock?

00:10:50.860 | Because some of these companies are still growing, but their multiples were so high

00:10:55.020 | that they couldn't possibly live up to the expectations.

00:10:57.140 | So how do you think through the fundamentals on one hand, but the expectations on the other

00:11:00.740 | hand, which rarely are in line with one another?

00:11:03.020 | Feroldi: Yeah.

00:11:04.020 | And you just said it.

00:11:05.020 | I mean, there's no doubt that these companies were trading at very high multiples in 2020,

00:11:09.060 | and those multiples have been compressed.

00:11:10.640 | But even still today on some of these stocks, you still can't call them classically cheap.

00:11:15.520 | Like even Shopify, which is down 60-something percent, it still trades at a very high multiple

00:11:21.720 | to profits and free cash flow.

00:11:23.760 | So these are absolutely the kind of questions you need to think through as an investor.

00:11:27.200 | And personally, when I'm investing in companies like this, not only am I trying to buy spaced

00:11:32.240 | out over different time periods, I'm also trying to invest during different cycles of

00:11:38.500 | the market.

00:11:39.500 | High growth stocks were in vogue 18 months ago.

00:11:42.440 | Now nobody wants to own them.

00:11:43.960 | And the question here is worried that there could be further big drops ahead.

00:11:48.600 | That's entirely in the realm of possibility.

00:11:51.460 | But I think if you're going to own some of these companies, companies like this with

00:11:54.560 | a multi-year time horizon, you have to just stay focused on the business and just know

00:11:59.640 | that you're going to pay high valuation sometimes, low valuation sometimes, and that long term

00:12:04.360 | the business results are going to drive returns.

00:12:06.040 | All right.

00:12:07.040 | Okay.

00:12:08.040 | Let's do another one about another company that's getting smoked lately.

00:12:10.140 | Okay.

00:12:11.420 | So up next we have, "I started investing in Square in 2019 when shares were about $65 a

00:12:17.380 | share.

00:12:18.380 | During the Corona crash, I was able to scoop shares around $40, which brought my cost basis

00:12:21.980 | way down.

00:12:22.980 | I continued to buy the entire way up, and with the recent pullback, I'm now pretty much

00:12:26.660 | even, even though the stock has done well on the chart."

00:12:29.500 | By the way, I'm not exactly sure when this question came in, so it might have been a

00:12:33.220 | while.

00:12:34.220 | "How do you accumulate gains while dollar cost averaging?

00:12:37.300 | And how do you measure performance?

00:12:38.840 | Money-weighted return or actual return?

00:12:41.540 | Let's also assume one's pay is going up each year, so as you average in, you're making

00:12:45.140 | larger purchases.

00:12:46.140 | If the market goes up more than it goes down, aren't we buying more shares when they're

00:12:50.740 | most expensive?"

00:12:51.740 | All right.

00:12:52.740 | Let's put the chart of Square on here.

00:12:54.220 | By the way, I'm sick of all these tech companies changing their name.

00:12:56.740 | I went to look for this today on YCharts, and it's called Blocknow.

00:13:00.060 | Jack Dorsey said he's the blackhead.

00:13:02.460 | Stop changing your names, people.

00:13:03.820 | Keep it the same.

00:13:04.820 | It's too hard to understand.

00:13:05.820 | All right.

00:13:06.820 | Anyway, Square is down, or Block, whatever it's called, well over 60%.

00:13:09.300 | This person says they've been dollar cost averaging in.

00:13:11.140 | Now, if you're a long-term holder, that's technically what you want.

00:13:14.700 | This is the Warren Buffett school, right?

00:13:15.960 | If a stock is getting crushed, you want to be buying when it's lower because everything

00:13:19.060 | is on sale.

00:13:20.980 | And this is also an interesting question from the idea of, does dollar cost averaging into

00:13:24.820 | individual stocks actually make sense?

00:13:26.460 | Because if we're talking about an index fund or an ETF, you can be pretty sure it's not

00:13:30.340 | going to go to zero or go away, right?

00:13:32.580 | And so buying when it's going lower makes a lot of sense because you can be pretty sure

00:13:37.060 | that it's probably going to be doing much better in the years ahead.

00:13:40.360 | The same is not true of individual stocks.

00:13:42.100 | You talk about all those worst-case stocks where we have some survivorship bias.

00:13:45.220 | They don't always come back.

00:13:46.660 | So what do you think about doing some sort of dollar cost averaging into an individual

00:13:50.620 | stock to start a position?

00:13:52.900 | And at what point do you get too worried to say, all right, I think I've made a terrible

00:13:56.620 | mistake here?

00:13:57.620 | Yeah, that is, again, a really hard question.

00:14:00.620 | And I think you just brought up an excellent point.

00:14:02.580 | Dollar cost averaging into the S&P 500, the Nasdaq, even the Dow, that makes a whole lot

00:14:08.060 | of sense because over the long periods of time, those indices will go up because you're

00:14:11.980 | buying huge swaths of the economy, a huge number of growing profitable companies.

00:14:16.580 | And while some of them will certainly fail, on the whole, you can be pretty sure that

00:14:21.100 | over long periods of time, the market will go up.

00:14:23.900 | Individual stock investing is an entirely different category.

00:14:27.140 | And to his point, he seemed to be getting in in 2019 at some pretty good prices.

00:14:31.940 | He added on the way down.

00:14:33.380 | And then he was also adding at the highs last year.

00:14:36.980 | I think Square was up to like $289, was like the peak price, now down to $100.

00:14:43.280 | So net-net, his total position is about even.

00:14:46.740 | And that's what you need to look at.

00:14:48.340 | When I'm buying an individual company, I care about the total amount invested and the total

00:14:52.180 | amount that I have.

00:14:53.980 | I don't care that some of my purchases were in the green and some of them were in the

00:14:57.220 | red.

00:14:58.220 | I want to know if the money I'm putting into this company, am I doing well over time?

00:15:02.800 | But it is worth noting that those purchases that were in the green, that's because he

00:15:06.180 | purchased them three plus years ago.

00:15:08.880 | And you won't know if those purchases you made in 2021 are going to be in the green

00:15:13.040 | at any point until the business has a time to continue to execute.

00:15:16.520 | So if he stopped adding today, the time to really judge is this company doing well or

00:15:20.960 | has it done well is in 2023, 2024, even 2025.

00:15:25.280 | But to your point, but to your point, Ben, Square the business is far more dynamic, right?

00:15:30.200 | The fundamentals of Square are changing far, far faster than they are at the S&P 500.

00:15:35.280 | And this is why you really have to focus on the fundamental growth drivers of the business.

00:15:38.920 | If you're happy with how Block is performing in the long-term trajectory of the business,

00:15:44.480 | then yes, I think dollar costing averaging in can be a viable strategy.

00:15:48.120 | However, that could turn on a dime if Block's business headed south.

00:15:53.440 | So far, though, the company continues to execute, although it is worth noting that their Bitcoin,

00:15:57.520 | their involvement with Bitcoin, have made their financials pretty tricky to actually

00:16:00.800 | dig through, like their revenue is actually no longer a good number to judge the company

00:16:04.440 | by.

00:16:05.440 | All right.

00:16:06.440 | Brian, I refuse to call it Block.

00:16:07.440 | I'm still calling it Square, just like Facebook has never met me, Google is not Alphabet.

00:16:11.400 | This question brings up another point about you start earning more income over the years.

00:16:15.400 | And do you keep putting the same amount of money in something?

00:16:17.720 | I think that's actually a good time, if you start earning more, to maybe use that extra

00:16:21.280 | cash to rebalance in certain places, or potentially diversify even further if you start making

00:16:25.840 | more money.

00:16:26.840 | So I think that as you change and make more money, it's obviously a good problem to have.

00:16:29.880 | But that is an interesting thing to think about in terms of dollar cost averaging and

00:16:32.520 | how that changes it.

00:16:33.520 | So I think we have one more that's kind of similar.

00:16:34.520 | So let's do the next question, Duncan.

00:16:37.520 | Okay.

00:16:38.520 | So up next.

00:16:39.520 | Do you have any advice for someone who has a large sum of money to invest right now?

00:16:43.360 | So this makes me think back to Nick Majulie, you know, having Nick on the show.

00:16:47.200 | It's interesting to think about investing a large sum right now.

00:16:50.960 | Because especially when markets are going down, people panic a little easier.

00:16:54.720 | And everyone thinks that there's this Murphy's Law sort of thing where anything that can

00:16:58.320 | go wrong will go wrong, especially when I'm going to do this, right?

00:17:01.080 | So if I put a big slug of money to work right now, it's going to fall further and stocks

00:17:05.760 | are going to fall another 20%, and I'm going to totally mistime it.

00:17:08.920 | So this is the psychological aspect.

00:17:10.520 | Even though, whatever, three out of every four years in a stock market, you're going

00:17:14.400 | to be positive, right?

00:17:15.400 | Because 75% of the time, historically, you have the probability of seeing a gain.

00:17:18.720 | But people don't think that way when stocks are going down.

00:17:21.400 | So how do you think about this, Brian, in terms of deploying cash right now if you have

00:17:24.600 | some?

00:17:25.600 | Yeah.

00:17:26.600 | To your point, this is more of a psychological question than it is a mathematical question.

00:17:29.600 | I mean, the math that I've always seen on questions like this is, it always makes sense

00:17:32.680 | to put all your money in right away.

00:17:35.120 | But that is psychologically hard to do.

00:17:37.800 | If you do that, and then, to your point, the stock market continues to fall another 10

00:17:41.720 | to 20%, of course, you're going to feel stupid for doing so.

00:17:46.120 | So the way I would approach a problem like this is, personally, I wouldn't want to put

00:17:50.400 | it all in at once, even though, mathematically, I know that that's the right thing to do.

00:17:54.300 | So a simple solution is just to create a really simple table, a schedule for yourself, and

00:17:58.800 | to invest that money in a fixed schedule, say, over the next six months or a year or

00:18:03.600 | whatever it is.

00:18:04.680 | And if you want to take that strategy to the next level, one way that you can take advantage

00:18:08.580 | of market declines is to create that schedule for yourself and then also make a simple rule,

00:18:12.920 | like, OK, if the market falls x percent, say, 5%, I'm going to accelerate my next monthly

00:18:19.260 | investment early, and that's going to be the new starting date.

00:18:22.340 | And you could keep doing that again and again and again, so you're buying at lower and lower

00:18:25.680 | prices.

00:18:26.680 | Or if you're lucky enough to start investing and the market just stays flat or going up,

00:18:30.640 | just stick to the schedule.

00:18:31.800 | So that's one way that you can kind of take that money and put it in at better and better

00:18:35.680 | prices over time.

00:18:37.160 | But I think sticking to a schedule and just thinking through how you want to invest that

00:18:40.920 | ahead of time will really pay dividends down the road.

00:18:43.480 | I agree that you have to have a plan that's almost written out and follow it to a T and

00:18:47.520 | have some if-then rules.

00:18:48.840 | But the thing is, you can show people all the data you want about how putting a lump

00:18:52.140 | sum in makes more sense.

00:18:53.520 | Some people would just rather have that dollar cost average.

00:18:55.960 | That would make them feel better about putting it to work just because they don't know, and

00:19:01.920 | that uncertainty really nods at people.

00:19:03.560 | And they can say, "The data's fine, but this is me here and this is my one time to do this."

00:19:07.880 | That kind of reminds me of on the recent The Compound Friends where Josh was talking about

00:19:11.920 | his DCA on steroids strategy, where he's looking at the VIX and adding more as the market goes

00:19:18.760 | down and that kind of thing, doubling his contribution.

00:19:22.000 | You remember Nick and he were about to fight over it.

00:19:24.720 | Yeah.

00:19:25.720 | Sorry, Josh.

00:19:26.720 | I was on Nick's side here because that's harder to do.

00:19:28.360 | There was a value averaging strategy where you do that, where you're putting more money

00:19:34.280 | in when things are down and putting less in when things are up.

00:19:36.960 | I think, to Brian's point, picking a set amount and just doing it and then letting the market

00:19:41.680 | dictate that for you.

00:19:42.680 | So when stocks are going up, you're buying fewer shares.

00:19:44.960 | Stocks are going down, you're buying more shares.

00:19:47.200 | That's way easier to me.

00:19:48.200 | I think the more complex you make this, the harder it is to stick with it.

00:19:50.480 | So I think the simpler the better is usually my way to think about this.

00:19:55.260 | This reminds me of Colin's question, by the way.

00:19:56.840 | It's like, "What do I do?

00:19:57.840 | Do I drop that?

00:19:58.840 | Do I invest now?"

00:19:59.840 | The answer is merely, this is more your personal preferences than anything else.

00:20:03.440 | There's the mathematical answer and then there's the emotional answer.

00:20:05.840 | Which one you choose is totally depending on you.

00:20:07.560 | Yeah.

00:20:08.560 | And the thing is, the biggest thing is you do something you can stick with.

00:20:11.280 | You could pick the perfect strategy in the world and if you can't stick with it, it's

00:20:14.480 | basically going to be a failing strategy.

00:20:16.200 | It's not going to work.

00:20:17.200 | So you have to just pick something.

00:20:18.400 | Even if it's suboptimal for a spreadsheet, if you can see it through, that's the one

00:20:22.560 | that makes sense.

00:20:23.560 | All right.

00:20:24.560 | Last question.

00:20:25.560 | Okay.

00:20:26.560 | This is a nice short and sweet one.

00:20:28.640 | Why does the stock market go up over the long term?

00:20:30.960 | All right.

00:20:31.960 | And if you could, just keep this brief.

00:20:33.120 | Just explain.

00:20:34.120 | Yeah.

00:20:35.120 | Sure.

00:20:36.120 | This was a plant.

00:20:37.120 | So this is, Brian has a new book out, Why Does the Stock Market Go Up?

00:20:40.760 | Everything you should have been taught about investing in school but weren't.

00:20:42.660 | It's a great guide for beginners, intermediate people, even people like us that have been

00:20:47.280 | doing this for a while.

00:20:48.520 | So I'm curious how you thought through this because there are a lot of people who think

00:20:53.720 | that the stock market is just this thing that's rigged against them by wealthy people in the

00:20:58.240 | Illuminati or they think that it's a casino.

00:21:01.080 | And so I think there's a lot of people out there who don't really try to take a step

00:21:04.520 | back and think like, "Wait.

00:21:05.520 | Why does the stock market go up over time and why does it get high returns than most

00:21:08.920 | other financial assets?"

00:21:09.920 | So how did you approach this question?

00:21:11.280 | Yeah.

00:21:12.280 | Or I asked that question on Twitter and the people on Twitter, a ton of answers I got

00:21:15.320 | was the Fed.

00:21:16.320 | Like that was the only answer was the Federal Reserve means they go up.

00:21:20.680 | And to be fair, this is a question that is actually, this perplexed me personally for

00:21:25.440 | years and if you look at the chart of the S&P 500 or Dow over long periods of time,

00:21:31.060 | it's as clear as day what the long-term trend is.

00:21:33.640 | It's like up and to the right.

00:21:35.680 | But what I think is such a mystery is people that are looking at the stock market, what

00:21:40.280 | is the only data or the data that gets 99% of the headlines?

00:21:45.040 | Price.

00:21:46.080 | Just price.

00:21:47.080 | That's the only information that we have.

00:21:49.500 | We never see the thing behind the data that's actually driving stock price returns over

00:21:54.520 | long periods of time.

00:21:55.520 | Yeah.

00:21:56.520 | The news at 5 o'clock never says the S&P 500 paid out $100 million in dividends this quarter

00:21:59.880 | or something.

00:22:00.880 | No one cares about that.

00:22:01.880 | Exactly.

00:22:02.880 | And to me, before I really understood why the market went up, I really wanted to answer

00:22:07.000 | why does an individual stock go up?

00:22:08.880 | I really think because those are the building blocks of the indices, right?

00:22:11.720 | So just as a simple example, I had heard for years, Starbucks, great investment, right?

00:22:16.600 | It'd been a great investment.

00:22:17.600 | I was like, "Well, I don't understand why.

00:22:19.280 | There's a Starbucks that I go to regularly.

00:22:21.340 | Why has it been a great investment?"

00:22:23.340 | But if you look back, Starbucks came public in 1992 at a split adjusted price of $0.35

00:22:28.980 | per share.

00:22:29.980 | Today, it's worth $76 per share.

00:22:33.020 | Why?

00:22:34.020 | Why did the company go up so much in value?

00:22:35.740 | Well, in 1992, the company had 154 stores and generated $92 million in revenue.

00:22:42.100 | Last year, they had 34,000 stores and they generated $29 billion in revenue.

00:22:48.980 | With Starbucks, the business became far more profitable and far bigger.

00:22:53.980 | Stock market works exactly the same way.

00:22:56.820 | All of the components in the S&P 500 and in the Dow, they're working to increase their

00:23:02.060 | revenue, increase their profits.

00:23:03.740 | In turn, their businesses as a group become more valuable over time.

00:23:08.380 | And that is a factor that drives the stock market higher over time.

00:23:13.740 | But that is something that is not obvious.

00:23:15.820 | That is something that I've never seen taught in schools or anything like that.

00:23:20.220 | So I wrote the book to just make the very basic connection between what the business

00:23:24.820 | community's profits does and what the stocks does and kind of give people a framework for

00:23:28.740 | thinking about why the market goes up over time.

00:23:31.100 | One of my favorite stats that I've found, I think over the last 100 years, the dividends

00:23:35.380 | paid on S&P 500 stocks has gone up like 5% a year.

00:23:39.020 | So that's actually cash coming out of the business, that's investor shares of profits.

00:23:42.940 | And you're right, people don't really think about the fundamentals of that.

00:23:46.320 | They think, "I kind of like this brand and this celebrity person seems to like this company,

00:23:50.860 | so I'm going to invest in it."

00:23:52.660 | And you're right, like there are these fundamentals and obviously in the short term, those fundamentals

00:23:56.540 | of the stock market and those companies can get way out of whack with one another.

00:23:59.820 | We've seen that happen.

00:24:00.820 | 2020 was an example to the upside, 2022 might be an example to the downside.

00:24:05.180 | It's never going to match.

00:24:06.180 | But over the long term, like it all sort of seems to work itself out and shake out in

00:24:10.640 | your favor where I think investing in the stock market is your way to take part in innovation

00:24:16.220 | from businesses and profits over time and the growth in that.

00:24:19.860 | And that's what it is.

00:24:20.860 | You're investing in global corporations that earn profits and are motivated to continue

00:24:27.100 | to grow those profits and make themselves bigger and more profitable over time.

00:24:32.540 | But again, that fact is hidden from view because everything is focused on just price.

00:24:37.340 | That's the only information that you get is just price.

00:24:39.780 | And if you're only looking at price and you have no idea it's attached to anything else,

00:24:43.760 | of course, you're going to come away and say it's rigged or it's just a big gambling machine

00:24:47.980 | because you don't understand what you're actually buying.

00:24:50.420 | All right.

00:24:51.420 | I think I've shared this before, but when my wife and I were going to get married, we

00:24:53.700 | had like a financial talk because I'm a huge nerd.

00:24:56.300 | And I came prepared and I told her, "Listen, 100% of our retirement savings are going into

00:25:01.540 | the stock market."

00:25:02.540 | And she said, "That seems crazy to me.

00:25:04.420 | That seems dangerous.

00:25:05.420 | Aren't we going to lose our money?"

00:25:07.420 | And she kind of had some of these myths perpetuated by TV shows and movies and stuff that like

00:25:12.340 | the stock market is a place you go to have people take advantage of you and obviously

00:25:15.920 | that can happen.

00:25:16.960 | But it's also this place like that you can, that real people can play in the same marketplace

00:25:22.760 | as the professionals, right, and invest alongside of them and invest in these huge corporations

00:25:27.480 | and buy a piece of them.

00:25:28.980 | And that to me is like one of the most wonderful things about it.

00:25:31.480 | So I really get upset when people try to scare people out of the market.

00:25:34.720 | Like I think what we should be doing is getting more people involved.

00:25:36.520 | And I think that's what you're trying to do with the book, right?

00:25:38.760 | Very, very much so.

00:25:39.920 | And to your point, what are the most popular movies about investing that have ever existed?

00:25:44.480 | It's like the Wolf of Wall Street or Wall Street or Margin Call.

00:25:48.800 | That is how a lot of people get their perception of the market is through movies that are just

00:25:52.800 | Wall Street preying on everyday people.

00:25:55.760 | So it totally makes sense why so many people have that perception.

00:25:59.640 | I think it's also taken for granted like you're saying just what a tool this is for the average

00:26:04.920 | person really in the scheme of things to actually build and accrue wealth that, yeah, there

00:26:10.200 | used to be this mentality of the stock market's just for the people who already have a bunch

00:26:13.760 | of money.

00:26:14.760 | And, you know, especially in the commission-free world now, it's like, no, it's everyone's

00:26:19.000 | like tool that everyone can use and even the little guy can.

00:26:23.080 | And I think even the information that we have accessible to now, right, we can listen to

00:26:27.640 | conference calls.

00:26:28.640 | We can get financial data.

00:26:29.640 | We can get SEC filings like instantaneously.

00:26:32.000 | All of that was incredibly hard just like 30 years ago.

00:26:35.520 | Right.

00:26:36.520 | Yeah.

00:26:37.520 | And I think another, what's going on in the market right now, like why does the stock

00:26:40.120 | market go up?

00:26:41.120 | Because sometimes it goes down too.

00:26:42.120 | Like that's part of it too.

00:26:43.120 | There's risk involved.

00:26:44.120 | And so you wouldn't earn higher returns if there wasn't some risk involved.

00:26:46.240 | So I think that's something that people have to realize too that this year is not like

00:26:49.680 | some sort of watershed moment where the stock market is reminding people that like it's

00:26:53.480 | not that easy.

00:26:54.480 | Like that's part of it.

00:26:55.480 | But also the stock market has to go down so it can go up over time.

00:26:58.720 | That's part of it too.

00:26:59.720 | And the funny thing about that is I think if you ask somebody why does the stock market

00:27:03.280 | go down, that's at least intuitive, right?

00:27:06.240 | Inflation right now.

00:27:07.240 | Rates are going up.

00:27:08.240 | There's a war.

00:27:09.240 | It makes sense why the market is going down, right?

00:27:11.200 | 2008, people are losing their houses.

00:27:12.680 | Market down.

00:27:13.680 | 2000, dot-com crash.

00:27:15.000 | Market down.

00:27:16.000 | Totally makes sense.

00:27:17.000 | Never made sense to me.

00:27:18.000 | Well, why does it come back up?

00:27:19.000 | Why does that happen?

00:27:20.000 | That never made sense to me.

00:27:21.160 | Yeah.

00:27:22.160 | Because it's a process and not an event.

00:27:23.800 | So again, check out Brian's new book, Why Does the Stock Market Go Up?

00:27:28.640 | Somewhere you get your books.

00:27:29.640 | Anything else to plug, Brian?

00:27:30.640 | That's it.

00:27:31.640 | Thank you so much.

00:27:32.640 | You get the floor.

00:27:33.640 | All right.

00:27:34.640 | Thanks for coming on.

00:27:35.640 | I have something to plug.

00:27:36.640 | What's up, Duncan?

00:27:37.640 | Everyone should go read your piece, It's Okay to be Confused, right now.

00:27:41.640 | Okay.

00:27:42.640 | Yeah, I put that on yesterday.

00:27:43.640 | Because that's on a lot of the same kind of stuff.

00:27:44.640 | I think a lot of the cross-currents in the economy and the markets are very confusing.

00:27:48.600 | And I think it's okay to admit that sometimes that you just don't know what's going to happen

00:27:52.160 | and what's shaking out.

00:27:53.160 | I do think this is one of the more interesting periods that we've had, especially since the

00:27:57.760 | pandemic.

00:27:58.760 | There's all this stuff going on.

00:27:59.760 | It's kind of fun.

00:28:00.760 | It's scary.

00:28:01.760 | It's scary right now.

00:28:02.760 | Check out Brian.

00:28:03.760 | Follow Brian on Twitter.

00:28:04.760 | He's always got some great stuff to post.

00:28:05.760 | Charts, thoughts, quotes.

00:28:06.760 | Remember, idontshop.com for your compound merch needs.

00:28:10.880 | Duncan looking good in the racing hat and jacket today, I've got to say.

00:28:13.800 | A lot of people in chat blowing it up.

00:28:17.320 | Askthecompoundshow@gmail.com if you want to ask us another question.

00:28:20.160 | Our questions are overflowing right now.

00:28:21.880 | We're going to have to do another lightning round.

00:28:22.960 | But no ticker this time, Duncan.

00:28:24.560 | Okay.

00:28:25.560 | Okay.

00:28:26.560 | We'll see everyone next week.

00:28:27.560 | Sounds good.

00:28:28.560 | Thanks, everyone.

00:28:29.560 | Thanks for having me, guys.

00:28:29.560 | I'll see you next time.

00:28:30.560 | Bye.

00:28:31.560 | Bye.

00:28:32.560 | Bye.

00:28:33.560 | Bye.

00:28:34.560 | Bye.

00:28:35.560 | Bye.

00:28:36.560 | Bye.

00:28:37.560 | Bye.

00:28:38.560 | Bye.

00:28:38.560 | [Music]

Why Does the Stock Market Go Up? | Portfolio Rescue

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