The difficulty of holding during drawdowns… tech’s recent underperformance… an example of the benefit of holding strong with a great stock

We begin today’s Digest with a quote from Matt McCall, from his Moneyline podcast earlier this week:

There are really three decisions you need to make when investing in the stock market: buying, selling, and holding.

Buying typically is pretty easy because you’re excited about a stock, so you want to buy it.

Selling is not as easy because you’re usually either selling with a win, saying “I hope I don’t sell and it keeps going” or “I don’t want to take a loss but I have to sell here. I hope it doesn’t bounce back.” So, selling is not as easy.

But the hardest thing to do is hold.

Holding, watching your stocks go down every day is very difficult. But you have to think big-picture as to what the future holds for us.

These sentiments are especially timely given the upheaval in the market this week. Interestingly, we’ve chosen this chaotic week to run a segment we’ve been calling “What the Bleep is Going On?”

In this segment, we’ve highlighted the general craziness of the markets today, and asked our analysts to explain what’s happening, why, and most importantly, what we can do about it.

Today, we turn to our trend investing and technology expert, Matt McCall, editor of Investment Opportunities.

Regular Digest readers know that Matt is incredibly excited by the potential for extraordinary wealth creation this decade, generated by top-shelf technology stocks. The problem is that between “extraordinary wealth in the future” and “now,” will be a volatile market with gut-wrenching drops that can challenge the staying-power of even the most stalwart investor.

In Matt’s Moneyline podcast from earlier this week, he came clean about the volatility we’re experiencing today – seeing tech stocks getting hammered, day-after-day, is affecting Matt too. Especially because he’s been hearing from panicked investors who need some talking off-the-ledge.

From Matt:

People are freaking out, thinking “My God. I can’t handle this anymore. I need to sell out of all my tech stocks. And maybe sell out of everything, as a matter of fact.”

I want to implore you not to do that. That is not how you become a successful, long-term investor.

In today’s installment of “What the Bleep is Going On?” let’s find out what Matt sees as the source of the recent market upheaval, with a focus on tech. And then let’s turn to his actionable advice for investors today.

***A sector rotation doesn’t mean tech is dead

So, what’s at the heart of this market volatility?

Well, as we’ve highlighted this week from our various analysts, we’re seeing a spike in bond yields that’s fueling fears of inflation.

The spike in yields is heightening fears that central banks will be forced to raise rates to combat inflation. As the thinking goes, higher rates would slow economic growth, which would be a drag on corporate earnings (especially for technology stocks). Lower earnings mean falling stock prices.

This fear of rising rates been resulting in a massive rotation within the stock market. We’ve seen huge currents of capital flow out of tech plays into traditional, non-tech plays.

To illustrate, in Matt’s podcast, he brought up a chart of a handful of more-traditional bricks-and-mortar retailers – Boot Barn, Dillard’s, Macy’s, and Nordstrom, as well as the tech-heavy, online retailer, Amazon. (By the way, Matt’s Moneyline podcast is on YouTube, so there’s video as well.)

Below is the chart. It highlights a span of roughly six months between last November and mid-March. It shows the traditional retailers up between 63% and 168%.

Meanwhile, Amazon was trounced by comparison, climbing just 1.5% over that period.

Here’s Matt:

What does that tell you?

It tells you there’s been a major rotation of money out of growth stocks – the future of retail – into value stocks, or value “traps” in my mind, which are the “past” of retail.

I’m not saying these retailers will go out of business. They’re going to struggle though, especially a Nordstrom and a Macy’s.

So, people ask me – “why are my stocks down in the last four or five months?” Because money has been going into the dogs. And it’s been coming out of leaders, or at least not flowing into the leaders.

Matt then asks a question that cuts to the heart of the issue…

Despite the difference in returns recently, if you had to pick just one of these stocks to buy today and hold over the coming years, what would it be?

Would you really buy, say, Macy’s over Amazon?

For most investors, that answer is probably “no.”

That reality puts this sector-rotation into a different light.

***What we’ve been seeing is simply a natural part of market-dynamics, and should not be confused with the belief that Amazon (and similar tech leaders) are “done”

Back to Matt:

I’ve been doing this for over twenty years and this happens all the time. You see rotations all the time. From growth to value, from small-cap to large-cap.

Back in the day, 15 years ago, when these rotations happened, it would take a year or so for the slow rotation from one sector to the other. And then that trend could last for quite some time. You could see value outperform for two years or so.

But today, things move so fast. That is why you’re see a sudden switch.

Matt references the retail chart again…

Look how quickly that happened. That’s a six-month time-frame. Look how fast the money came out, then went in. In the past this would take more time. Now, the money shifts so fast.

Matt stresses that investors can’t allow themselves to be completely reactive. When your focus is on stock prices, rather than fundamentals, you risk making self-defeating decisions.

To illustrate, Matt points to a decidedly non-tech play – Boston Beer Company (SAM), the manufacturer behind the popular brand, Sam Adams.

Take a guess… If you’d invested $10,000 in Boston Beer Company 20 years ago, what would it be worth today?

More than $1.17 million.

Back to Matt:

The only way to make this type of money, over a 20-year time frame, is to do the hardest thing in investing, which is hold.

Because trying to get in out of this stock along the way…never would have happened.

To support his point, Matt zeroes in on SAM’s chart over those 20 years, pointing toward many pullbacks of 20%+. He echoes that trying to time all the associated buying-and-selling would have been impossible.

***So, what action step can nervous investors take today to help them focus on the long-term while this craziness plays out?

Back to Matt:

Build a map. Take all the traditional sectors – technology, finance, industrials, and so on. And then break them down into sub-sectors.

For example, in transportation, there’s autonomous vehicles, electric vehicles, charging stations, flying cars, batteries…

Create this big map, then say, “this is where we are now. Now, where will the future be?”

Factor in investment themes such as inflation in the future and higher interest rates in the future, and how that will play out…

How will we allocate our portfolios to that? And how much percentage in each?

If you’re managing your money at home, every once in a while, lay that out. You might realize you have too much in growth, or in electric vehicles… Too much in one area, not enough in other areas.

It will help you during these pullbacks in the future. It’s something we’re doing for our clients and I think it’s a great way to view things.

As we wrap up today, when Matt looks at “What the Bleep is Going On?”, he sees money flowing from tech leaders into value plays. But while following that move might help your short-term returns, Matt believes the big money this decade will be made through tech.

So, staying with tech despite today’s weakness boils down to a choice you must make – will you focus on the short-term or long-term?

Here’s Matt on what matters most from a big-picture perspective:

At the end of the day, from month-to-month, quarter-to-quarter, markets can be very irrational. Extremely inefficient.

But over time, they become rational.

Trust me – over time, the Amazon’s of the world will go up. The Boston Beer’s of the world will go up. Because they’re increasing sales, increasing their bottom line, and are taking market share.

It’s pretty simple – if companies are able to do that, their share price will move higher.

A reminder to check out Matt’s Moneyline podcast – it’s some of the best, most actionable investment content out there…for free!

We’ll see you tomorrow with our last “What the Bleep is Going On?” installment.

Have a good evening,

Jeff Remsburg