Hello everybody, it's Sam from Financial Samurai, and in this episode I want to talk about the stock market. In particular, what I think about the stock market at this level, we're close to $3,000 on the S&P 500. And why I realized I don't like to talk about the stock market and I don't like to write about the stock market, because there are so many opinions.

If I talk about why I sold stocks, I'm going to get bashed on the one side from bullish investors who think that's a ridiculous idea. And then when I talk about why I'm willing to buy some stocks, I get bashed on the other side from bearish investors who think it's absurd.

So that is the interesting thing about the stock market. It is the market. And a market needs to have a buyer and a seller. So whatever information I put out there is going to be refuted by probably half the readership or half the listenership. And that's fine, everybody has an opinion.

But it's just the shelf life on talking about stocks at a particular moment in time, like right now, might only be around a week or a month because stocks are, especially in volatile times, always moving. Whereas when I talk about real estate, there's some really longer term trends and some fundamentals that we can discuss that can last for a very long, long time.

Now obviously I can talk about long term trends and fundamentals with the stock market, but I realized I just don't like to do it. I spent 13 years of my career in equities, so that's stocks. And I've seen people do very well and I've seen people who I thought were really smart just overthink things and significantly underperform or lose money in a decent market.

And so stocks, it's really up to you to decide whether this is the right asset class for you. It's always going to be around 20% of my net worth, plus or minus 5%, because that's just how I like it. I don't like the volatility of stocks as much as other asset classes.

I do appreciate the 100% passive income from the dividends that I receive. And I also appreciate that there's no carrying costs for stocks. But I'd much rather talk about long term trends, such as the post I wrote called Focus on Trends, Why I'm Investing in the Heartland of America.

I wrote that several years ago, maybe it was 2016 or 2017. But the thesis was that thanks to technology and the trend of telecommuting and working from home, more and more people would escape expensive, very densely populated areas and go to less expensive areas and find a better life with lower cost of living expenses if they could make a comparable income.

And what we're seeing now, obviously, with the lockdowns, the quarantines, the shelter in place, the pandemic, and so forth, is that there is an acceleration of that trend going forward. So as an investor, it's much better to focus on trends, long term trends, identify those trends, and invest in those long term trends for the future.

Otherwise, investing, thinking, researching, analyzing stocks, specific stocks, is a very tiring endeavor. It actually will create a lower return on effort if you have to always think about the short term. So you want to think about the long term. So obviously, the longest term and the easiest way is to just invest in the S&P 500.

And that's where I have the majority of my equity investments in. But I do have a significant portion of my equity investments in individual stocks, because I believe that I have the insights to hopefully identify trend long term. And that one trend that I identified in stocks over the past 15 years has been investing in technology stocks.

I'm here in San Francisco. I hear about technology all day long. Technology and the internet is the future. I even left the finance industry to focus on Financial Samurai, which is an online media company that is also dependent on technology and the rise of internet penetration rates and usage.

So I'm all in on this trend. I'm living, breathing this trend. And I'm investing in this trend. And I think the technology trend is going to continue. So really spend some time focusing on trends. In this podcast, I just want to share what I'm doing with my money with regards to stocks.

First of all, I want to say that I have many, many different public investment portfolios. Because I don't have a job anymore, I rolled over my 401k to a rollover IRA. Because I have Financial Samurai, I created a SEP IRA. Because I did freelance work as a 1099, I created a solo 401k.

And because I have children, I created 529 plans. So whenever you hear me talk about stocks, and you hear someone else talk about stocks, you can't just automatically think the person only has one stock portfolio. I think most people have multiple stock portfolios. Maybe not as many as I do.

But I think most people have a taxable investment account, a 401k, those two portfolios. And if he or she does not, then they're probably a single person with a very simple life. And that's cool. That's not a problem. But when you listen to stock investment advice, or you listen to people talking about the stock market and investing, you've got to really understand where he or she is coming from.

And where I'm coming from is that I haven't had a job, I haven't had a day job since 2012. And I rely on my taxable investment portfolio to help fund my retirement lifestyle or my existing lifestyle right now. I really don't want to go to work. Therefore, my taxable investment portfolio, which is my main portfolio, there's two portfolios, is more important.

It's more conservative, and it's much larger than my tax advantageous investment portfolio, such as my 401k, 529 plan, solo 401k, SEP IRA, and so forth. I cannot afford to lose a lot of money in my taxable investment portfolio. That's why it's conservative. That's why I'm shooting for single digit returns.

I don't have a withdrawal rate for my investment income, because thankfully, I'm able to live below the return rate and below the dividend yield rate. And that's really financial independence 101, having a large enough investment portfolio spit off a large enough amount of income, so it can cover your desired lifestyle expenses.

Now, as for my tax advantageous portfolios, those are long, long term investments. And I don't have as much fear about them because they're being invested for the next 15 to 18 to 20 plus years. And so in that kind of time horizon, okay, obviously losing 30% of the value of these portfolios is really going to hurt.

And it stinks. It sucks. I hate it. I actually want to sell everything and just kind of be really conservative. But I know over the long term, stocks are provided roughly around a 10% compound annual return since 1926. And that's including dividends reinvested. All right, so hopefully you understand where I'm coming from.

I've got a larger taxable investment portfolio. And I've got multiple smaller tax advantageous portfolios when you combine them, they're still much smaller than my taxable investment portfolio. So you might be wondering, where do I think the stock market will go? What is my crystal ball say with the S&P 500 at close to 3000?

Well, I talked about predicting a stock market bottom in March, where it was going to bound them around 2300 to 2400 and I would be buying the S&P 500 below 2400. The S&P 500 did indeed bottom at around 2250, somewhere around there. And it's just shot up by about 33% at the time of this episode.

So what now? Well, I have sold all the stock that I bought in March. And I put a lot, I put a lot into the market, I put about $500,000. So am I up 30% or $150,000 on the $500,000? Nope, not at all, because I was buying on the way down, and I was selling on the way up.

So overall, I probably made about about a 15% return on the $500,000. And that's about a 70 $75,000 return. Does that sound good? It's okay. What's more important for me is the rebound in my overall portfolio, because that is much greater than the $500,000. And so I've sold all those stocks that I bought.

And I've sold a little bit more from the tech stocks that have had a huge rebound, like Tesla. I mean, Tesla went to like 900, and then it went down to 400. And then it went up to 850. And I'm like, okay, you know what, that volatility is just a little too crazy.

I'm going to pare down about 50% of my holdings and just de-risk, de-risk, de-risk. And the reason why I've decided to de-risk is very simple. We've come so far so quickly, and valuations are at around 22 times forward earnings. So if you look at the history of the stock market, 22 times forward earnings is about as high as we were back in the early 2000s.

That was during the dot-com bubble. And I don't think, I don't think that analysts have been cutting their estimates fast enough and aggressive enough. Overall, the S&P 500 earnings are being cut by about 15% to 17%. They're getting cut more and more as time goes on, as we realize the lockdowns are lasting longer than expected.

And I think as we realize that a lot of these jobs are just not coming back. But if you think about it, if you cut earnings, this is consensus earnings on the S&P 500 by only 15% to 17% for the year, does that reflect the proper devastation of the economy?

I don't think so. 15% to 17%. Okay, yes, there are definitely sectors that are doing well. A little over 20% of the S&P 500 is made up of the gorillas that are doing really well, the Googles, the Amazons, the Microsofts. So fine, their earnings might be up. Let's just take a look at them one by one.

No, let's not do that because that's just a little too complicated. But again, think about it. Is a 15% to 17% earnings per share cut for the S&P 500 in 2020 enough? I don't think so. And because I don't think so, I think the true price to earnings ratio for the S&P 500 is not 22 times, it's probably more like 25 times.

So it's more expensive than what the current estimates are. Because I think the current estimates are still too high. So everything is relative, folks. Everything is about expectations when you're investing. And I personally believe that with a 32% plus rebound since the March lows, I think investors are expecting a much faster and much stronger recovery than what's really going to happen.

Let's hope there's no second wave. Let's hope there's no another one month lockdown during winter. Let's hope. But the reality is, there is that chance. And I want everyone, when they're investing with their active money, to think in bets, to think in probabilities. If we're at 3000 on the S&P 500, and the record was something around 3350, what is the probability that we're going to reach a new record high by rising another 10% to 12%?

Versus what is the probability that we'll probably be range bound maybe between 2600 and 3000 for the remaining year? And what is the probability that we might go down and retest the lows or break the lows? Think about it. Just think about it. Take your time. My thoughts are that there's a 30% probability, I think, we reach new record highs, which sounds kind of crazy given there's 40 million unemployed Americans, probably going to go to 50 million.

A lot of these businesses are not coming back. And a lot of these jobs are now coming back. But the Fed and the government have been all in on supporting the economy and various asset classes. So 30% chance that the markets could retest and reach new record highs. I think there's a maybe 50% chance that we just kind of trade range bound between 25, 2600 and 3000 on the S&P 500.

And on the downside, I think there's probably a 30% chance that we retest the lows. So not a great chance to reach new highs, not a great chance to reach new lows. I think the lows are in when we reach 2250 in mid-March. So what does that mean? What does that mean?

That means that we're probably going to be range bound, I think, for the foreseeable future. And that means that the easy money, the easy money, the easy rebound money has been made. So the easy money has been made, then it's likely that your money stuck in the stock market is going to be dead money for the foreseeable future, or it's going to go down in value.

And given this is what I believe, I've decided to take profits and take money off the table with my taxable investments, because I have a new mission. I have a new mission in 2020 and 2021. And that is to find great deals in the real estate market. Now admittedly, it is proving to be more difficult than I thought it would be.

But I think that value is out there. And I cannot risk losing, you know, 20, 30, 40% of my money in the stock market if I'm looking to buy another property. My taxable investment money is used to pay for the life that I want to live right now, whether it's through providing income, through dividend income, or whether it's by providing capital, enough capital for me to buy a good deal on a property, and then I would just rent out my existing property going forward.

There's always a right now use for my money. And that's what I want everybody to practice thinking about. There's no point saving, working so hard, taking risk, investing money, and never spending your investment dollars on a better life. You want to consistently every year, use some of your profits to pay for a better life.

Your life is not guaranteed. We all know this, especially given what's going on with the world right now. If you die with mega millions of dollars or way more than you ever need, you lose. That's just a waste of time, waste of stress, waste of energy. You've got to figure out how to consumption smooth.

And the way to do that is to just do some modeling, spend some time, go into Excel, type out what your savings would be over the next 5, 10, 20, 30 years, estimate the potential returns. And if you die with too much, no, no, no, you got a course correct.

You got to spend a little bit more money on yourself, on your family, your friends, on institutions and people who need the money. Do whatever it takes. Just don't die with too much money in the bank or in your investment accounts. Now for all my tax advantageous investment accounts, for the most part, I've pretty much kept them intact.

I'm not going to be de-risking my 529 plans for my kids because they won't need them for another 15 to 18 years. And I don't want to stress about it. I just don't want to think about that stuff. Just set it, forget it, and spend my energy and time living the life that I want.

Now as for your investment accounts, you should think about it the same way. You should identify purposes for every single investment account. Your 401k and your IRA and your Roth IRA should be there to provide for a comfortable retirement after the age of 59 and a half. So if you are decades away from 59 and a half, or even if you're just one decade away from 59 and a half, you probably don't want to touch your investments.

I mean who would have thought that we would have rebounded by 30% with such devastation in the economy? Not me. I definitely didn't think we rebounded this quickly. So you just never really know. And therefore, if you can't time the market, which most of us cannot, including myself, I can't time it properly, then you should probably just leave these type of investment accounts alone and continue to dollar a cost average over time.

You know dollar cost averaging as you get older and wealthier is easy. The 401k maximum contribution, for example, is $19,500 for 2020. $19,500 shouldn't be a majority of your income. You know if you make, let's say, $100,000 household income, you're contributing less than 20% of your gross income in your 401k.

That is not that risky, especially if you spread it out over 12 months. But in terms of investing a large amount of money, let's say $50,000, $100,000, or $5,000 to $10X, which you normally invest in the market, that is something different. That is something that I don't think it's wise to invest a larger sum of money after a massive rebound when value regions are very expensive and expectations are very, very high.

It was okay to do that when expectations were very, very low when the Dow was at $18,500 and the S&P 500 was at $2250. But now, I think the risk/reward ratio is not in the investor's favor right now. As a result, I'm not willing to put new money to work in my taxable investment accounts.

Or my tax advantageous accounts, yeah, dollar cost average, $6,000 in your IRA, okay, no problem. $19,500 in your 401k, okay, no problem. But investing $50,000, $100,000, multi-hundred thousand, millions right now, it just doesn't seem like a good idea. Now even though I am skeptical of the stock market after this huge rebound, and I fear that we're going to be in a trading range or just go lower, I still am not going 100% cash.

Again, because I have purpose for every single investment account. And let me just share some reasons why maybe the stock market will continue to hold up and reach new record highs, right? I think there's a 30% chance we keep on going higher and we'll be higher by the end of the year.

So one, there are plenty of people benefiting from this crazy depression pandemic recession. Not everybody is losing like the media makes it out to believe. If you want less stress, if you want to feel less freaked out, you got to stay away from the news folks, you got to stay away from the media.

Maybe listen to Financial Samurai or other people who have more balanced viewpoints, because the media tends to want to talk about more horror stories to drive more views and more clicks. That's the way it is. Negativity sells better than positivity. Nobody wants to hear someone doing really well during a pandemic.

Two, the Federal Reserve is definitely on the investor's side. Fed Chair Powell has implicitly said he's going to do whatever it takes and use whatever amount of the Fed's balance sheet to support the economy and buy assets. They can buy everything because they, or we, America, we can print an endless amount of money and we are a global currency.

Three, the federal government is on our side. They too can just lend out money, forgive money, create all these infrastructure works projects to help millions of people get jobs again. That's what happened with the New Deal when FDR announced it between 1933 and 1939. There's no doubt this is going to happen again in 2020, 2021.

Four, there could be a vaccine that comes sooner rather than later. You know, it's a race for billions. Whoever finds it is going to be a very, very wealthy person. So you've got companies like Gilead, AstraZeneca, Moderna, all racing to find that vaccine and they are just going to crush it if they do find it.

Five, you want to hedge against a layoff. The irony about what we're seeing right now is that the more a company lays off and the more the economy has shown a rise in unemployment claims, the stronger the stock market has gotten. You see this time and time again when a company announces massive layoffs, the stock shoots up.

Every week in April when there were record high unemployment claims, the S&P 500, the Dow, the Nasdaq, they all shot up. And they shoot up because the idea is that there's going to be hopefully more stimulus, more support from the Fed and the government, and that companies are going to be just as productive and have higher operating profits with less overhead.

Another reason why to own stocks is because of low bond yields. Everything is relative in finance. So stock investors look at bond yields, which is the risk-free rate of return, specifically U.S. Treasury bond yields, like the 10-year bond yield, and think, "Okay, how much equity risk premium do I deserve?

Am I willing to demand to take more risk in the stock market?" Well, if you look at the 10-year bond yield, it's currently around 0.6 to 0.7%. That's ridiculously low. So nobody investing in bonds is trying to make a lot of money. People are investing in bonds for safety.

And so when an investor thinks about relative returns, he or she thinks, "Well, 10-year bond yield, the 30-year bond yield is so low, and if the dividend yield on the S&P 500 is higher, well then, not only am I getting a higher dividend yield, I have the potential to make a higher capital return." And history suggests that back in 2008 and 2009, when the S&P 500 index dividend yield was higher than 30-year U.S.

Treasury bond yield, it was a good time to buy. But that time is a little bit different from this time because we've already rebounded by a lot. If I were to tell you this back in March about the dividend yield of the S&P 500 higher than 30-year Treasury bond yield, which it was, that would have been a great indicator.

But now, it's really tough. And then finally, I think it's worth noting, it's worth noting that there's a tremendous amount of cash on the sidelines. As the stock market has gone up, the cash hoard on the sidelines has gone up, up, up, up. We're talking about something like $4.8 trillion worth of cash, which is more cash by about a trillion than back in August 2008.

So having a lot of cash on the sidelines is definitely a good indicator for a potential continuation of the stock market rebound if there's more good news on the coronavirus fund and on the economic front. It is a ton of cash, folks. And I definitely encourage you to click over to the post and check out that cash on the sidelines chart because it is massive.

Those with experience or who've lived through the dot-com bubble crash, the global financial crisis in 2008 and 2009, realize that cash is very, very valuable during times of uncertainty. People who didn't have cash weren't able to survive. They had to liquidate their homes and their investments at the bottom.

Those who didn't have cash couldn't take advantage of fire sale prices in various types of asset classes. So a lot of people have learned from the past and are starting to hoard cash to be better protected this time around. Cash is really important. Please have a higher than normal cash amount because this thing ain't over yet, folks.

And if you think it is over this quickly, well, I got a Dumbarton Bridge to sell you. Overall, I am optimistic. I'm optimistic that we're not going to fall into the abyss because the federal government and the Federal Reserve are going to save us. They're going to save us.

And up until this global pandemic, the economy was looking great. Balance sheets were very strong. Profitability was very strong. Household balance sheet was very strong. We've been doing a great job since 2009, 2010. So long as the government can keep supporting us during the lockdown period and during the gradual opening up period, I think we're going to be okay.

So keep the faith, folks. And I hope this is the last I'm going to talk about the stock market for a while because, man, I really don't enjoy talking about it, even though you might enjoy hearing about it. And if you appreciate this episode, I'd appreciate a great review and a share.

Thanks so much, everyone, and I'll see you guys around.