Stock markets are not predictable and have uncertainties. So is the economy, covid, trade, politics etc. Nobody knows what will happen and the only certainty is uncertainty. But, can we have some certainty when it comes to stock market investing? Yes we can! It all boils down to investing fundamentals, and what those matter for you. The key is to be in a place where the worst outcome is ok and allows you to create new streams of income with the current streams. This allows for long-term compounding and achieving satisfying investing returns.
Stock Market Outlook - The Investing Answer For Uncertainty
Good day fellow investors. I recently went for a cup of coffee with a friend that later turned into four cups of coffee. And we discussed a lot of things extremely irrelevant to the current market situation. So we discussed the economy, the market, where will the market likely go the outlook, the coronavirus, will it come back, trade, geopolitics, and those are lots of uncertainties. But we managed to always come back to the same answer, the answer that always works when it comes to investing.
We also discussed the last dance, we are humans after all. But the summary of it all was that if you're an investor, you can find the answers that plague most of investors now about the market, about the economy, about what will happen, how to invest your money.
And in this video, I really want to discuss those topics, see what are the possible answers there? And then drill it down to a system to a few steps that you can eliminate that eliminate the noise and focus on what really made matters when it comes to investing.
I'll give you a few examples that will perfectly explain the situation to you. And then it will be up to you whether you are an investor that really wants to focus on the knowns out there, or we want to continue to speculate on where will the market go next?
Let's start. So if you like stock market into YouTube, there are all these videos discussing stocks going up or down, should you sell, should you hold, warnings about the stock markets, live stock market coverage that is full of value, I'm sure, and then also Warren Buffett's predicting a crash or something like that.
So that is easy to sell because it focuses on short term greed and fear. And even if I do that, if I type stock market crash had that my views simply explode.
So if I want to take advantage of the YouTube algorithm, then simply I have to sell fear, sell greed. And that's the best answer for YouTube. However, it's not the best answer for investing. I take the topics and then turn them around into investing the same as I will do with this video.
So most people are focused on okay, where will the stock market go? Will it go higher? And will it go down? Will it go up? And that's the answer. Nobody knows, of course.
Ray Dalio, he tries to look at 500 years of history, discuss those cycles, the big debt cycles, the market cycles, the Empires cycles, and he tries to find an answer there, but we'll see whether he'll find an answer or not.
That's always an issue. Let's go to someone who I prefer a little bit more and in a recent memo Howard Marks from Oaktree capital, discussed uncertainties. So, he discussed uncertainties and asked who has the answers? So, these are the questions that you are supposed to know, just to give an answer to the Coronavirus situation. Will the virus succumb to warm weather and humidity?
And will the vaccination have to be renewed annually? Will the virus mutate etc, etc? Who has the answer to all these questions? Nobody. And that's also in line with predictions. If we look at his quotes that he found great quotes.
"Those who have knowledge don't predict, those who predict don't have knowledge" by Lao Tzu. Albert Einstein, "I never think of the future it comes soon enough." And then of course, to finish with Warren Buffett, "forecasts usually tell us more of the forecaster than of the future."
So if the market is so uncertain the economy the Coronavirus situation, geopolitics have a bigger and bigger effect. How can we know where to invest, what to do? Well, we have to boil it down, to narrow it down to the fundamentals that are relatively known and certain. So we have to eliminate our greed of knowing where will the market go in the next three months what to do, how to make money there.
And we have to bring it down to the fundamentals that always work. That's my answer to all these questions, to all the uncertainty, eliminate the noise and bring it down to fundamentals?
Let me show you a few examples. When Jeff Bezos asked Warren Buffett, your investing strategy is so simple, why doesn't everyone just copy you? Well, he says because nobody wants to get rich, slow. Nobody wants to get rich, slow. And if you want to get rich, slow, this is the channel to subscribe to, because investing is about the long term, about quality, about value. And that's what I'm trying to do here. I'll limit the number of videos I publish. So please subscribe, click that notification bell to support the channel.
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Now, let's go to the answer part. You have to first put aside your greed, then stop speculating and focus on the investing part. It's boring. Nobody wants to get rich slowly, but it's the only way of doing it right sustainably over your whole investing life cycle. So let's take this example in 2009, Warren Buffett bought Burlington Northern Santa Fe, the Railroad.
He paid on a valuation, total valuation 36 billion and the company had 2.1 billion in net income. So he bought a business. And how did he eliminate noise? Well, he bought the whole company, so no more stock prices, there was no market anymore for this business. He owned 100% of it.
So he eliminated the stock market noise. So when investing, try to eliminate the stock market noise and think as an owner, if I buy this, would I own it forever? Am I ready to own it forever? If you're not ready to own it forever, then you're a speculator not an investor. Let's see what Buffett did and how that evolved.
And then over the next steps, you'll understand what investing is and what the answer is. What did he focus on 35-36 billion he paid 2 billion in net income. And I even want to search the 2007 Burlington Northern Santa Fe annual report to see whether he bought higher earnings in the past.
And surprisingly, earnings were even lower in good years 2006, 2007, 2009 those earnings were 2 billion. Nevertheless, let's see what happened in the future, which was a positive. So he paid 36 billion for 2 billion in earnings. However, that was in 2009.
So when Warren Buffett bought Burlington Northern, their earnings were close to 2 billion, as we said, dividend was a little bit lower. Perhaps they're saved on that point, but he was happy buying this company, buying on a price earnings ratio of what 18, 2x18=36 billion then as the economy recovered, business proved, earnings improved. But this was a bonus that was a likely possible bonus when he bought, but he was happy with the 5% return when he bought later those earnings grew, grew and grew. And he got approximately 30 billion out in the form of dividends. This right blueish column are the dividend. So 4 billion, 2015, don't have the data for later, but he got about 3-4 billion in dividends in cash flows out of this situation. But at the beginning, he was very happy paying a price earnings ratio of 20 for the business. Later the upside developed, which I don't know whether was his goal or not, he was happy owning such a good business representing the American economy.
So the worst case, he said, I get 5% and the key with the dividends is that he created new cash flow streams. What kind of new cash flow streams look at what he was doing in 2016 2018, he started buying more and more of Apple, which is now his largest stock portfolio. But 30 billion came into Berkshire. He also had cash. But he created the second stream of income, which he was happy to do with the 2-4 billion dividend, which was unknown when he bought but he was happy with what he was buying. And he knew that over time, he'll create new cash flow streams with the old cash flow streams and that is what investing is all about. On the S&P 500. mainly focus on this. Where will stocks go? Oh, if stocks can go another 5, 10, 20, 30, 40, 50% up, but let's focus on the basics. The dividend yield is 2% for the S&P 500. This is a known and this is a known that we like to stay like that. The earning yield is 4.73% at the moment was higher in history. But this leads to the conclusion that you will likely get a return from 4% to 7%. If we add 2% growth, a little bit of inflation, and that's what you can expect over the long term over the next 20 years. So that's really long term investing.
In the short term, nobody knows what will valuations be in three years, what will the economy look like. So it can go up and down. But if you want to be an investor, then if it goes down, you're happy because you can add more over time which investing is but if you're speculating that the market needs to go 50, 60% up so you can reach your target and retire. That's speculation, and that often ends up badly. So this is investing, the answer is S&P 500, 4 to 7% long term with ups and downs. And that's it. And if you focus on that, if you're happy with 5% then the S&P 500 is a good investment for you over the next 20 years, knowing that it can fall 50% if you can tolerate it falling 50% then you're not an investor.
Let me show you another example of investing from my side. So we bought this house in 2015 for 294 2080 was the final price. This was the asked price 280,000 euros. So it was a small house about 100 square metres 1000 square feet. And we bought this house not because it could go up in price.
We bought it because Okay, we said it doesn't look that good. We can refurbish it, okay. And we said it doesn't look that good. We can refurbish it, and then that's somehow how we can create value but the actual goal when we bought it. This is how it looked when we sold it not when we bought it, it was terrible.
But the goal was to live in the house, if we move out, the goal was to rent it out, have the rent, which was higher for that market for that house on the market much higher than the mortgage, have the rent, pay for the mortgage to repair repairment and everything.
And the actual goal was in a normal scenario, 40 years down the road, we end up with a house that will give us good income from renting it out forever after 40 years. So when buying my goal was okay in 30 years, I get the house because either we live in it or the rent pays for the mortgage. That was it.
That was what made things very, very simple when calculating the investment and whether we should do it or not. And that's the position you have to be when it comes to investing.
Of course we refurbished the House. So this is what it looks looked when we sold it. This is what it looks when we bought it.
So we improve the house, it wasn't a big investment you see mostly paint, new floors, a little bit of our furniture. But it really improved the house, the outlook of the house, and we got a great price when we sold last year. So we made 150,000 on this purchase, it was total leverage.
So huge return on investment. But that wasn't the goal as I said. The goal was to have a house in 30 years, then the market rewarded us and that's okay. So if you're investing and you have no goals, except for extremely long term, then it's okay when the market rewards you. But don't expect that because that's speculating.
The key is that you forget about things, all the things that we mentioned that you cannot know and focus on the things you can know. What are the likely long term earnings? What's the value of the asset?
What is the worst case scenario in? What's the best case scenario? Can you handle the worst case scenario? And are you happy some just being an owner or just being an investor? That's the answer you have to give yourself. And you have to ask yourself when looking at your portfolio, if you're speculating, then you might get in trouble. And all those stock market crash videos will not help you.
Let's go to another few examples. Let's discuss Berkshire Hathaway. Okay, the stock practically didn't go anywhere with three years but everybody is looking okay, where will the stock go? Can this double can this triple in the next 5 to 10 years, 2 years, will it go down 50%. That's what people are focused on. But investing made simple would say that Berkshire made 32 billion in earnings in 2019 on a market capitalization of 424 million that leads to a 7.5% earnings return. Add inflation, add economic growth and you get to a likely long term return of between 7 to 10%. But of course the stock can crash if there is an economic downturn, etc, etc. A stock that I recently researched this week spent, a lot of time on it, is Nutrien. It produces fertilisers, and the stock is significantly down. It's good business, paying a dividend yield of five point 27%. The rest where it will go depends on potash prices mostly and those don't have a good outlook. So I analyse the company, this is just the summary. But all in all, the 5% dividend is pretty likely and now it's up to you. Okay, am I happy with 5% dividend for the very long term? If yes, then this might be a stock that's interesting for you, but you have to behave as an owner and not focusing on stock prices.
So the key is to focus on what always works. Look at the worst case scenario. Am I happy with the worst case scenario, when you're happy with the worst case scenario, the long term scenario that whatever happens scenario, I am fine, then you can start investing and then you can start developing better and better strategies, analysis for your personal finances.
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