The Two Important Questions You Need to Ask When Markets Dislocate

Given the rockiness of the markets, I decided to devote today to advice for managing through downside volatility... With today's drop, the benchmark S&P 500 Index officially hit correction territory of down 10% in the short year to date, joining the tech-heavy Nasdaq Composite Index and the small-cap bellwether Russell 2000 Index that had already […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Two Important Questions You Need to Ask When Markets Dislocate By Berna Barshay Given the rockiness of the markets, I decided to devote today to advice for managing through downside volatility... With today's drop, the benchmark S&P 500 Index officially hit correction territory of down 10% in the short year to date, joining the tech-heavy Nasdaq Composite Index and the small-cap bellwether Russell 2000 Index that had already hit down 10% year to date earlier in the month. It's an unsettling move even for the strong of heart. For those of us who spend a lot of our investing time and dollars in small-cap land, it's even more unsettling... The Russell 2000 actually peaked earlier than its larger-cap peers, setting a high of 2442.74 back on November 8. Since then, it's down a whopping 18%. The Russell 2000 is just a hair from official bear market territory, which is defined by a 20% drop from recent highs. Forgetting semantics, no matter what you call these plunges – corrections or bear markets – they don't feel good. I'm not going to spend too much time rehashing what we all already know. The markets are worried about inflation and the return to higher rates as the U.S. Federal Reserve tries to push back on rising prices. With higher rates and the end of COVID-related stimulus payments that were geared to keep consumers spending in 2020 and 2021, almost everyone is worried about slower economic growth. The sell-off started in unprofitable, high-valuation, high-growth tech stocks... but the contagion has generally spread everywhere and there has been nowhere to hide, save energy stocks, which are off to the races this year. The exploration and production-focused Energy Select Sector SPDR Fund (XLE) is up 9% year-to-date and oil-services companies are doing even better, with the VanEck Vectors Oil Services Fund (OIH) up 12%. The tech giants that led the markets for so much of 2021 have stopped being a place to hide, with bellwethers like Alphabet (GOOGL), Apple (AAPL), and Nvidia (NVDA) actually in line with or trailing the S&P 500 so far this year, down 10%, 10%, and 22%, respectively. Adding insult to injury for many folks, the dream of cryptocurrencies being an uncorrelated asset class and a store of value apart from the "mainstream" of Wall Street has come crashing into a brick wall with bitcoin and ethereum down 26% and 40% year to date respectively... Simply put, there has been nowhere to hide (except maybe energy stocks – and I would caution any investor from putting all their eggs into one sector basket)... It's all rather unnerving, but it's important to try and keep emotions out of it... It's easy to get upset when your account is going the wrong way. No one likes having less money today than they had yesterday. It's also easy to beat yourself up and go into a negative thought loop of "woulda, coulda, shoulda." That voice goes off in your head, saying something along the lines of this... I had such big gains in stock XYZ, why didn't I sell it all, or at least take some profits on some of it? I knew stock ABC was overvalued, but I was greedy, and I hung on... I knew this Company X was a piece of garbage being propped up by a hype machine, why didn't I short it? If you have suffered any version of this inner monologue, you're in good company. Pretty much every investor – from the most experienced titans of Wall Street running billions of dollars to the newbie with their first meager investment account – goes through this. But looking backwards isn't productive. Nor is getting upset. This emotionally taxing market had me thinking about an exchange I had a couple of weeks ago on Twitter... Source: Twitter/@InnocenceCapit1 I was joking around about my propensity to get inappropriately emotional over small, unimportant stuff but then remain calm and sometimes (chillingly) even-keeled when really bad stuff happens, particularly in the markets. But staying cool in challenging times is one more tool in your arsenal for making money. Emotional control sits right up there with fundamental analysis, technical analysis, trading discipline, the ability to imagine the future, sector expertise, and every other skill that contributes to your long-term investment success. --------------------------------------------------------------- Recommended Links: [Will You Get Wiped Out in 2022?]( Experts like Leon Cooperman and Stanley Druckenmiller have issued dire financial warnings for 2022. This is why Whitney Tilson has invited three of the brightest financial minds in the country to a first-ever panel discussion... And it could have a HUGE impact on your wealth, beginning immediately. [Register today (for FREE) by clicking here](. --------------------------------------------------------------- [The 'EVERYTHING CHIP']( A new industry is being built around an "everything chip"... that's more sophisticated than the chips in your smartphone or laptop. One little-known company is at the forefront of this technology, and the man CNBC nicknamed "The Prophet" says this company will be "America's Next Big Monopoly." Best of all, you can buy this stock for less than $10. It's no wonder the smart money, like Cathie Wood and Bill Gates, has already invested over $350 million. [Click here for the full story](. --------------------------------------------------------------- If you are feeling flustered, remember markets go up over time... Time is your friend, if you are invested in solid companies... and you aren't egregiously overpaying for them. When the markets dislocate like they have this January, there is pain but there is also massive opportunity. There are margin calls, hedge funds reducing risk, and a ton of other reasons good companies get sold off and end up well below their long-term value. Taking this into account, it's a good time to do a review of what you own. Ask yourself the following two important questions about each stock in your portfolio... 1. Is this a solid company? Some of the other questions that will help you answer the big question above... Do I have high conviction this company will be around in 10 years and be the size that it is now or bigger? Do I trust the management team? Is the company profitable and have margins been trending over time in the right way? If the answer is yes, great. If the answer is no, you need to be honest with yourself and assess if there is a tangible trajectory to making profits that makes sense and is intuitively understandable. Having no history of making money is a big red flag, but not always a reason to sell. 2. Is the price today a reasonable one to pay for this stock? For a lot of 2020 and some of 2021, valuation didn't matter. It pains me to say it and pained me at the time to be in that kind of market, because while I invest in some growth stocks, deep in my heart, I'm a value investor. I believe the price you pay for something does have a big influence on your returns in the long run... although in the short run, it may not matter at all. Until very recently, valuation really wasn't important at all, especially with high-growth stocks. In fact, paying too much attention to valuation probably cost you money. I think this period of valuation not mattering has ended for this cycle. There will be a time that valuation won't matter again... but I don't expect that time to come very soon. There's no one rule for valuation... but just because a company has been cut in half, don't assume it is now reasonably valued. An unprofitable company with no clear path to profitability that goes from an enterprise value ("EV") to earnings before interest, taxes, depreciation, and amortization ("EBITDA") ratio of 12 times to 6 times may be down 50%... but it also may not be cheap. And if a company fails the first question – "Is this a solid company?" – it doesn't matter how much it is down... you don't want to invest in it. Rent the Runway (RENT) is down around 70% since I wrote in the [November 8 Empire Financial Daily]( that you should stay away from this loser stock. A 70% fall is a giant drop, but without a business model that makes sense... no price is low enough to buy this thing. So the time to panic is when you find yourself owning a company that fails question No. 1... If you have a dog, it's good to panic and get out! This is not the time to panic, it's the time to rebalance... Take a look at your stocks with a cold heart. If a stock fails both question No. 1 and question No. 2... it's time to panic, but just about that stock! Forget about making your money back, sell it, and move onto something better. There will be other ways to make your money back... don't waste time trying to "get to even" on a dog. Mistakes happen, move on... but be smart about it. But don't panic... Tech site Protocol's daily newsletter had some fun comments on panic this morning... By all means, panic. Panic is fun! The future is rarely invented by the understressed. Even if there is a superbubble, there's more money on the sidelines. A16z is reportedly raising another $4.5 billion to invest in crypto. One founder's bubble pop is another entrepreneur's treasure, freeing up cash and people to chase a different dream. And the goo on your Allbirds? Just wipe it off. No one's going to notice when we're all racing forward. Somewhere a bubble is popping, elsewhere a new renaissance (or even a bubble!) may be taking off. Keep looking forward, don't look back. If you're feeling overwhelmed by all the macro noise and the recent drop in the market, make sure to tune into our special event tomorrow night... For the first time as a group, Whitney, Enrique, Herb, and I will all be getting together on camera for a special conversation about our outlook for the markets in 2022. We'll touch on all of today's hot topics – inflation, cryptos, and the best place to put money right now. It kicks off at 8 p.m. Eastern time tomorrow night, and it's completely free to attend... Just make sure to reserve your spot [right here](. In the mailbag, letters in reaction to my piece on nuclear power last Monday... Have you made any major moves since the market slide began? Are there certain types of stocks you are buying and others you are trimming? Do you have any advice for your fellow investors on how to keep your emotions in check, not panic, and not make emotionally driven decisions you will regret? Share your thoughts in an e-mail by clicking [here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna). "My concern about nuclear energy is that we get 30-40 years of use out of a nuclear power plant and we get 10,000 years of radioactive waste out of that reactor. Human written history is not even that long. How are we going to deal with the waste? Seems like a long time of dangerous waste for such a small return." – Craig S. "The technology and expertise for safe nuclear energy are available and have been for many years, but it's been an issue of political will. It's been politically popular to be against nuclear for years, but solar and wind aren't enough. It's just critical to do nuclear safely." – Doug T. "Nuclear power – clean, lean and green. Also very safe with today's technology." – Les J. "Hi Berna. Nuclear is the *only* part of the 'green equation'. "Unless you count the endless gritting, fearmongering and wholesale fraud that comprises the greenwashing equation. The epic bull market in bulls--t, hubris, and stonks ended last year, finally, and the bear that's begun will hopefully take out the trash and its charlatan shovelers. "In any case, it's refreshing to see you mentioning uranium & nuclear! This is my third uranium bull, and while related stocks are already up hundreds of percent it's still early innings. "A massive rotation from fantasy to reality is underway: a major bull market in margin calls, resources and real money (gold) has begun. Cheers." – Bruno Regards, Berna Barshay January 24, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. 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