Embrace the Volatility Window

If you have any money in the stock market, you've probably noticed that things are massively more volatile than they've been in a while. But what might spook some investors could be a big opportunity for others.

In this episode of MarketFoolery, host Mac Greer and analysts Jason Moser and Jeff Fischer talk about investing for the long term in volatile times. They offer some advice for staying sane during a short-term roller-coaster ride, a few companies that are solid picks through thick and thin, and more. Also, the guys share a few stocks that they're not so sure about but that could have big potential in the long run.

A full transcript follows the video.

This video was recorded on July 12, 2018.

Mac Greer: It's Thursday, July 12th. Welcome to Market Foolery. I'm Mac Greer, and joining me in studio, we have Motley Fool analysts Jeff Fischer and Jason Moser. Gentlemen, welcome!

Jason Moser: Howdy!

Jeff Fischer: Hello!

Greer: How you feeling?

Fischer: Great.

Moser: Any better, I'd be twins.

Greer: I love that. As many of our dozens of listeners know by now, Chris is on a well-deserved vacation. I'm just trying not to trash the place.

Moser: Have you even heard from him?

Greer: I have not heard from him, and that's a good thing.

Moser: There was one thing at the beginning of this week, he normally does a radio interview with folks up in Danbury, Connecticut. He knew he was going to be out, so he reeled me the process. He was getting ready to leave, and he was like, "Hey, before I take off, one thing. Take me off of the emails back and forth with y'all trying to figure this out." I was like, "Oh, yeah." I had to make sure to make a note to myself to do that because I didn't want to contribute to him getting off on the wrong foot with his vacation.

Greer: He's good at getting off the grid. I have a bad habit of checking email on vacation. Do you check email?

Moser: Yeah, email, Twitter, Slack, it never stops. It's bad.

Greer: Jeff, do you check it?

Fischer: Initially, yes. Then, after a few days or up to a week, my wife puts her foot down on that. Like, "Put that away or I will throw it in the river."

Moser: That's why they call it the better half.

Greer: Guys, we're going to do something a bit different on today's show. We're going to step back from the day's news. In fact, we're going to make our own news. We're going to kick the show off by having each of you share what you think your headline is for the stock market here in July of 2018. We're also going to share some stocks we like, and we're going to have some conflict, too. You have to have conflict. If there's going to be good drama, you have to have conflict.

Moser: Is this a dramatic show, though?

Greer: By conflict, I mean stocks you're conflicted over.

Moser: See what I'm doing right here, here is conflict. Right here.

Greer: Oh! I missed it! I missed the cue!

Moser: Not just a hat rack, my friend.

Greer: Oh my gosh. Not just a hat rack. Okay, with all that in mind, let's begin. Jeff Fischer, your headline for today's market?

Fischer: Trade War Uncertainty Brings Market Volatility. 

Greer: Ooh, I like that! There's kind of a rhyme there, too!

Fischer: Thank you, I just came up with that right now, too. I did. Before the show, you sent around topics like this, and I purposely didn't prepare because I wanted to see what comes naturally.

Greer: I like it.

Fischer: If you spend too much time on it -- anyway, I'm wasting time right now. But I think there's no question that trade war concerns and the tariffs that are going back and forth between, mostly, now, the U.S. and China, is causing a lot of this market volatility. And with good reason. In most cases, politics do not effectively influence earnings by a great degree. But in this case, it truly could. The politics that are taking place could, down the line, affect the earnings achieved by the S&P 500, and by many companies. It has a real possible implication for the market.

Greer: By extension, then, are you looking at any of your companies, any of the companies that you've invested in, any of the companies that you've recommended, do you look at any of those companies differently because of the trade war or the prospect of a trade war?

Fischer: The ones that we own, we make sure that we want to continue owning, as long-term as we are. This is a possible change in the story. We check that box. Then, when we're looking at new possible investments, we take into mind, how could this be affected by a prolonged trade war that affected trade around the world, basically. We do consider it, at least. That said, as Fools, we are still trying to just buy companies that will be strong and grow over many, many years, regardless of politics. But, again, like I just said, these politics could actually come into play.

Greer: Jason?

Moser: Yeah, I like that --

Greer: You don't love that, though. I heard a little reservation. You'd better have a better headline. [laughs] 

Moser: It's funny, Jeff and I have a word in common here, a theme in common, with our headlines. My headline -- and I actually thought about this some, Jeff. I don't know what you were doing --

Fischer: Sorry, I was busy.

Greer: Wow. There's the conflict!

Moser: I have to come up with this stuff. Embrace The Volatility -- It Opens Windows Of Opportunity.

Fischer: I want to pick that paper up.

Moser: The beauty of our political system is, when something goes so far in one direction, and it proves to be bad policy, at least we have a system that can fix it over the long run. So, I think his point is spot-on. You're still finding those businesses that you want to own for long periods of time. You're never going to see the needle move too far to one side and stay there for too long. 

But, I do think we are at a point here -- the volatility is plain. It's not an opinion, it's a fact. Just looking at data as of just a month or so ago, the S&P 500 has moved up or down at least 1% on 28 trading days already this year. To put that into context, there were just eight swings of that magnitude in all of last year. So, we can see that volatility in 2018 is not just opinion. It really is a fact that it's happening. 

I know a lot of people want to attribute that to this Administration, and there's probably something to that, but I also think we're in a much different time now in regard to the markets. Information travels so much more freely. Of course, when you have a President who embraces Twitter as he does and pretty much says whatever he wants without a filter, that can have an effect. I don't think that really changes, whenever he gets out of office. There's always going to be someone out there saying whatever they want. I think a lot of our favorite CEOs at times get out there and use Twitter and social media to defend their companies, or communicate ideas, or whatever that may be. 

I think, with the volatility, it can be scary. But if you look at that from the perspective of, we like to own businesses for long periods of time, that volatility can create opportunity to buy our favorite companies at a little bit more than an attractive price. See the forest for the trees. It makes investing a lot easier.

Greer: I want to ask you the same question that I asked Jeff. When you look at your headline and your thesis, are there particular companies, or maybe there's an industry, that, as an opportunistic investor, you say, "When that volatility kicks in, this is where I'm going to invest"?

Moser: Sure. I tend to look for businesses with very clear advantages, whether it's a network effect or a company that sells something and they have pricing power, perhaps something that might be a little bit immune to trade wars, perhaps. We'll talk about at least one of those businesses in a little while. I don't want to give it all away right now.

Fischer: He prepared!

Moser: I have to prepare. I mean, if I don't, if I come in here with just a dumb look on my face, I won't have anything to say. But, I do think, you look at businesses that are going to flourish regardless. Look at Alphabet. Regardless of economic conditions, search isn't going anywhere, and it's not going to abate. People are going to keep on using Google for whatever they need to find.

Fischer: And it isn't in China, anyway.

Moser: Exactly. Your companies like Facebook (META 0.14%), it could be argued that when people are looking to escape from reality, they're going to places like Facebook and Instagram. Those, perhaps, do better in times like these. Netflix. You look for those businesses that are no-brainers in good times and in bad. I think those are some examples.

Fischer: I agree. Once you get to the mindset where you view volatility as an opportunity, if you're at a point in life where you can --

Greer: As a window to opportunity, right? What was it?

Moser: Thanks for the clarification.

Fischer: I would shorten Jason's headline, by the way. That's a long headline.

Greer: That's good, I like it.

Fischer: It's good, but I'd just edit it.

Greer: So, what, Volatility Is Opportunity?

Moser: Embrace The Volatility Window.

Fischer: If you can be in that mindset, it makes investing so much more enjoyable. This morning, I was hoping for the markets to fall more than they did, for a moment, because it's always an opportunity if you have some cash that you want to put to work, and even better if you have a few stocks in particular that you've been waiting for to add to.

Moser: I want to ask you a question -- actually, both of you. Jeff, I value your opinion on this much more than I do Mac's, because let's just face it, Jeff's a smarter guy.

Greer: That's fair.

Fischer: I don't know about that.

Greer: It's hurtful, but fair.

Fischer: It is hurtful.

Moser: But, in all seriousness --

Fischer: We're all different levels of smart.

Moser: -- I would love the opinion here, because I think you're right. You want to be able to embrace volatility. You want to be able to embrace stocks going down. It's like Buffett says, when you're a net buyer of stocks, you're rooting for that price to go down in the short run. My question is, how do you get to that point? How did you get comfortable with the volatility? When did that happen for you? Has it happened for you? I feel very comfortable with it. I don't mind taking on a pretty decent amount of risk. I think, perhaps, a lot of that came from the fact that I've been investing for so long. Is it a time thing? It's a very difficult thing to teach, I feel like. But if it's a lesson you can learn, if it's a mindset you can adopt, it can be extremely powerful.

Fischer: Definitely. Two quick answers to that. If you're saving for retirement -- automatically with work, hopefully -- you should welcome volatility, you should welcome declines, as much as they can happen, just knowing that every two weeks, say, for most of us, you're putting more money into the market.

Moser: Getting a little bit more bang for your buck.

Fischer: Exactly. You want to buy at lower prices all these years, right up until your, say, early 50s, or even later these days. But, lower prices is good -- are good. I have to try to play the smart guy, since you called me smart. Proper English.

Moser: That's unpossible!

Fischer: For me personally, for the traditional accounts that I have, it's having cash. That's what really clicked to make me comfortable even when markets fall. Typically, I have about 20% cash on hand, or more. That means I look forward to opportunities to buy on dips.

Moser: I like that, keep a nice cash cushion there. A lot of people at this point in time would argue that you should be fully invested, because the market is obviously doing so well. 

Fischer: And to be fair -- always honest, but to be fair -- I would have better returns if I had been fully invested all these years, probably.

Moser: Maybe so. I'm like you, though, I like keeping a little bit of a cash balance on there, no matter what the conditions.

Greer: As do I. I think what's helped me the most is what Jeff just said. Looking back of my history, when I tried to dart in and out of stocks -- as a younger man, as a much younger man -- I just got my hat handed to me.

Moser: It's hard to do.

Greer: Yeah, it is hard to do. There are stretches -- Jeff, we started around the same time. In the late 90s, I owned Dell and eBay. It's almost worse when your first significant investing experience are these two stocks that are big winners, because then you start thinking, "You know what? I have this genius." You start mistaking luck for genius. And I'm not saying it was all luck, but yeah, it breeds overconfidence. Then I started spinning off into companies like JDS Uniphase, Ariba.

Moser: [laughs] Ariba?

Greer: The big thing, it was going to be the eBay of B2B -- I don't even know what that means, by the way. I know what it meant for me. It meant that you buy at $187 and it goes down to $1. But, yeah, it breeds overconfidence. I think in looking back at my own history and realizing that I was not very good at trying to dart in and out, that has been very instructive, and it's helped calm the waters and let me buy, not buy and hold, but buy to hold. My intent is to hold unless something extreme happens.

Moser: Good stuff, I think those are all great answers. I tend to agree. Something you noted there, having some failures early on, or just going through some difficult times, I feel like one of the best things that could have ever happened to us as investors was going through the financial crisis. I feel like the housing crisis, the financial crisis that came with that, those were tough times, but man, it really taught you a lot, and I think we're all better for it.

Greer: I agree. I think the most underrated attribute of a CEO, hands-down, is humility. If you're not humble, then you're not open to other possible solutions, you're not adaptable. Humility, I think, is huge. Now, there may be some exceptions. You could argue that a guy like Steve Jobs maybe wasn't that humble. But, you know what? That's the exception to the rule.

Moser: I was going to say, that's the exception on the rule. I mean, Kevin Plank, you could say, not very humble, and he kind of got called on it.

Greer: That's right, not working out too well.

Moser: I think it taught him a little bit of a lesson.

Fischer: And in a way, Jobs had humility by setting such a high standard for himself. Everything had to be perfect. It had to be perfect.

Greer: I like that. Let's move on to our next question. Speaking of all of this volatility, how about one stock you like no matter what? Obviously, the future is uncertain, especially in the short-term. One stock you like no matter what.

Fischer: You know, Mac, I did think about this a while, and I didn't really like any of my answers, although I believe in all of them. One that came to mind, surprisingly, was Facebook, mainly because it's gone through so many troubles -- and I don't think Jason is a fan -- and still has a lot of bruises and black eyes, deservedly so. But it's inexpensive. It trades in the mid-20Xs price to earnings multiple year-forward estimates --

Greer: Facebook is inexpensive. That may be surprising to hear for some people.

Fischer: Yeah, it looks inexpensive on the earnings power that it has. That said, they are going to increase spending a lot the rest of this year, but probably not quite as much as people estimate, hopefully. Anyway, Facebook came to mind, but Amazon (AMZN 1.49%)is the stronger one that I would stick with through thick and thin, as long as Jeff Bezos is at the helm. If you take him away, then you have someone new, someone uncertain running what's become a very complex, giant, sprawling operation.

Moser: Yeah, the jockey matters a lot in that case at this point, doesn't it?

Greer: Yeah. If Bezos left, I would not feel great about Amazon.

Fischer: But right now, as long as he's driving the bus, and free cash flow is there, and they keep exploring new avenues to grow, I think Amazon is probably the most fascinating company of our times right now.

Moser: Yeah. That was a name that definitely came across my mind. I mean, you're right, I'm not a fan of Facebook at all. The offering, the platform, I don't like it. I just don't use it. That said, I am bullish on the stock. It's hard to compete with networks of that size. And when you have multiple networks of that size? They're going to make some money, even in bad times. I think you're right, people are going to use those services in good times and bad. That's obviously good for their model, it's an ad play.

Fischer: Hopefully. I still worry that someday, people will tire of it.

Moser: I think we're seeing a little bit of that, maybe, with Facebook. I ask my wife about this from time to time, if she feels like her activity is going away from Facebook and more toward Instagram, and it is. Then, with our kids, for example, our two girls are 13 and 12. No desire for Facebook at all. Don't have Facebook profiles. Now, of course, they use Instagram. Instagram is that Facebook 2.0. I think it gives them a little bit of a lease on life in that regard.

Fischer: Yeah, if they can keep buying the up-and-coming social media companies ...

Moser: I think the problem is, they're going to have a really hard time making that case going forward, with everything that's happened regarding misuses of data and whatnot. For them to be able to make any meaningful acquisitions like that going forward, I think, is going to be really difficult. The good news for them is, I don't think they're in any rush right now. With WhatsApp, Messenger, Instagram, they still have a lot of ways to go with those.

I'm going to go a little bit further away from the tech side of things. I got a question the other day on Twitter from a buddy, Mike Ballone, who was asking me about a stock of this nature, a defensive idea, something I felt like would do well in thick and thin. He had asked my opinion on McCormick (MKC 1.04%). I think anybody who listens to this show knows that I love McCormick.

Greer: I never bought McCormick, and it torments me. Every quarterly earnings, I just die a little. I should just buy it.

Moser: I didn't buy it, either. As much as I pay that company for their products, I should have bought those shares. Maybe I still will. But for me, this is a business that is going to do well in good times and bad. They really own that aisle of the grocery store. And if you're not buying the McCormick brand label, and you're buying the private label? Guess what, McCormick has a pretty robust private label presence as well, not to mention the industrial side. They call that, now, Flavor Solutions. There's real science going on there. I still remember, so well, visiting their headquarters in Hunt Valley back in 2011. My thinking is that, I've liked this stock basically ever since I've been here at The Motley Fool. That's eight years and counting. And the stock has performed very well.

Greer: So, what's it going to take?

Moser: I don't know.

Greer: You're such a tease! You visited the headquarters!

Moser: I don't know, maybe I need to add it to the War on Cash basket. That's the only way it'll convince me, I guess. That's what prompted me to buy all four of those, was Chris and I calling on each other. But, Mike Olsen here gave me the opportunity to get a dividend recommendation out there in front of our members for a Market Pass last month, and I was able to go with McCormick. He and I both like it. I think there was a lot of skepticism when they initially made that RB Foods acquisition. It was a little bit out of their wheelhouse in that it was French's mustard and Frank's RedHot Sauce. There were some questions as to whether they'd be able to really pull that off. I think they've proven their case. 

I think that this is a business that will do well in good times and in bad. It's a dividend aristocrat. That dividend will continue to grow, and this RB Foods acquisition has turned out to be a really smart move. Management has been there for a long time. They have a lot of good reasons to own this company. It's a quintessential buy to hold investment.

Fischer: I like it. Jason, I bet 40% of our dozens of listeners thought one of us would say MasterCard or Visa.

Moser: That's distinctly possible.

Fischer: I purposely didn't for that reason.

Greer: I thought for sure. Or, I thought that Teladoc was going to make an appearance. You love Teladoc.

Moser: I mean, I do love it. But let's be clear, we have to get this thing through good times and bad. No matter what, money is going to be money, and hey, people have to eat, and they want that food be good.

Greer: You love Teladoc, I think, almost as much as I love a certain membership warehouse store that I will not name on this episode.

Moser: Rhymes with Lostco?

Greer: Potentially. Guys, let's end with some conflict, some healthy conflict. How about one stock you're conflicted over, one stock that you could see going either way? Jeff?

Fischer: Sure, Mac. I love this one. Stitch Fix (SFIX -0.94%), ticker is SFIX. A recent IPO. It's also a stock that we recommended in the Partnership Portfolio with Tom Gardner. Abi Malin is the analyst who recommended it. Obviously, I supported it, as well. The whole team was behind it. We like it. 

That doesn't mean it's without questions as a new, young company. Will it be able to keep its 2 million-plus paying customers for the long-term and build upon that? My concern rotates around the idea that they may lose customers after a certain amount of time. Even though they'll keep getting new customers to try the service, given that they're a young company, if they're churning customers, it would affect the stock badly, quickly. 

For those who don't know, very quickly -- most Fools listening do -- Stitch Fix ships you closing to your house. You try it on and send back what you don't want to keep. You pay a subscription to do this, and you pay for the clothes. Over time, it gets to know you better and better, so you should be getting a lot of clothes that you like. Interesting business model. They have the lead. They have great buzz. They have a great CEO. Great results so far. We're happy to have recommended it, because it's doing very well. But longer-term, it's going to be really interesting to see how they sustain.

Greer: Jason?

Moser: I'm kind of on the fence here with one that we've talked a lot about before, Mac -- TripAdvisor. It's been a long time. I've owned this stock personally for about three years.

Greer: Love the service, don't know about the stock.

Moser: It's about 20% down. It's been more disappointing than a box of raisins on Halloween. But I think it's possible that this company is maybe turning the corner a little bit. 

I think a lot of the troubles stem from their move to try to become more like a Priceline, trying to become more like an OTA, an online travel agent. They were trying to get in the hotel booking business, and it was a bad business decision. It didn't work. They invested a lot of money and didn't realize much of anything on that investment. That put them behind for a couple of years. 

They have gotten through this period. They recognized the error of their ways, restructuring the business, getting focused more on what they do really well, which is getting out great information to all of their users. And like you said, I love the platform. We used it a lot when we were in the Bahamas recently. It was extremely valuable and very helpful. I feel like this non-hotel side of the business, based on experiences and getting you to neat activities and places wherever you go, is starting to really catch fire for the company. 

Again, it's a very robust, engaged, and growing user base. I think this is a good business that made a really bad decision while back. It's not a bad business. I think that it's very possible that they could be turning a corner here. 

Earnings come out August, 2nd. I'm going to be very interested to see how things are going for them in the back half of this year and the beginning of 2019. Maybe I'll have a little bit more conviction after then.

Greer: Okay. Guys, there you go. We had some headlines, we had some stocks we like, a little bit of conflict. Thanks for joining me!

Fischer: Thank you!

Greer: As always, we love to hear your feedback, your questions, your comments. [email protected] is our email. Thanks for listening today. As always, people on the show may have interests in the stocks they talk about, and The Motley Fool may have recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We'll see you on Monday.