In this (not doomsday) episode of Market Foolery, host Chris Hill and Motley Fool contributor Jeff Fischer talk about today's biggest market news -- that is, the prolonged pullback we're seeing this week. Shares of big tech are selling off big, shares of Square (NYSE:SQ) are selling off even more, and the S&P is down for the sixth day in a row. Listen in and learn when it's time to sell (and how to keep calm when it's not), what metrics to check for your watchlist stocks, how to use pullbacks like this to boost your diversification, and more. Plus, the hosts discuss CFO Sarah Friar's departure from Square, and what it means for the company.

A full transcript follows the video.

This video was recorded on Oct. 11, 2018.

Chris Hill: It's Thursday, October 11. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, it's Jeff Fischer. How are you?

Jeff Fischer: Doing well! How are you, Chris?

Hill: I'm good! This is the "everybody calm down" episode of Market Foolery. Everybody take a breath.

Fischer: Bring in the half-dead advisor to calm you down. 

Hill: Well, no! Not half dead. 

Fischer: Emotionally, I mean.

Hill: [laughs] Jeff Fischer, great investor/ dead inside. No, I wanted you in here because you've seen this a couple of times. And let's not overblow what's happening today. We'll talk about what's happening today. But at the moment, this is not 2008, and this is not 2001. This is not the dot-bomb.

Fischer: I will say, Chris, like you, declines used to bother me much more. Any investor that's newer to this pursuit than you or I is going to be more shaken, I imagine, than we are. But once you've been through it a few times, you internalize that declines are a natural part of investing. Just as you believe you have the American-given right to grow your capital in the markets, you need to internalize and really know that the cost of growing your money over time is that markets decline. I can give you stats on how often they decline. We'll get to that.

Hill: Yes. Also, let's take a step back, which, as you said, it's hard to do, particularly for newer investors. Anyone who started investing in 2010, if you started investing in 2010, it's basically been nothing but sunshine and rainbows for the most part.

Fischer: Unicorns and all that.

Hill: Yes, it's been phenomenal. But even within 2018, it seems like, among other things that are happening right now, what has changed is the narrative. Among other things. But, think back to earlier in the year. The uber-narrative of overhanging the market was, "The economy's doing great!" And, "Corporate tax cuts are doing wonderful things for the companies that we own shares of!" Now, the narrative has shifted. The narrative now is, as we talked about last week on Motley Fool Money, rising interest rates, stocks being slightly less attractive. You've got the cost of goods going up, you've got the cost of wages going up. All of those things, I think, we need to internalize and also factor into our expectations for this earnings season.

Fischer: All of that, and you have super low unemployment rates, as well. How much better can that get? So, yeah, everything does look a little bit stretched to the positive after all these years of expansion. That said, interest rates are still historically low. GDP is still growing well above recessionary levels. A recession is any time that GDP declines year over year two quarters in a row. We're nowhere near that right now. Usually, the market declines in a lasting fashion, meaning for a few years, when there is a recession. Not without a recession, typically. 

Keeping that perspective, we still have more positives than negatives on balance. We do have the lower tax rates driving earnings growth even higher this year. That advantage, for the most part, goes away next year. But, you have strong enough economic growth to make leading companies continue to grow earnings next year.

That said, we're also seeing more concerns about the trade war that's starting to affect more companies. More companies are talking about it in conference calls. Expect that this month, as well, with earnings. The trade war so far has hurt international, foreign, companies more than U.S. companies, but that is slowly starting to change.

Hill: Jim Miller was talking about that the other day when he was here in the studio. One of the things he's going to be watching this earnings season is tariffs, and how often that comes up, not just in the reports but on the conference calls, as well.

I want to go back to something you touched on, because it reminded me. Again, it doesn't feel good to look at your portfolio and say, "Gosh! I knew that stock was going to be down. I didn't know it was going to be down that much," that sort of thing. It reminded me of the of the David Gardner quote. Stocks always go down faster than they go up, but they go up more than they go down.

Fischer: So true. To put some numbers on that, since 1960 the S&P 500 has had a positive return 79% of the time -- almost eight out of every 10 years, the S&P is up for the year. Only two out of ten years has it declined since 1960. Going all the way back to 1928, including the Great Depression, the S&P has still been positive 73% of the time. Three quarters of the time, basically, the market is up. One quarter of the time, it's down.

Those down years are far and few between. You'll have many up years for every one down year, just as you said, Chris. So, yes, David is right. These declines, thankfully, happened quickly. They feel sharp. It's like a sharp stick in the stomach with a knife, it happened so quickly.

Hill: Wait, has that happened to you in your lifetime?!

Fischer: No. I mean, I could go into one time when I was robbed in Paris at knifepoint, but that's another story. [laughs]

Hill: The knife stayed outside of your body, fortunately?

Fischer: It did, it did. It was just on my neck.

Hill: Oh, Lord!

Fischer: In broad daylight. So, it feels a little like that. I can tell you how that feels. It happens very quickly. Next thing you know, all the money you were taking out of the ATM is gone. But that's OK because you're thinking long-term and there's more in the bank. There we go, did we tie that in pretty well?

Hill: I think you did tie that in well.

Fischer: It also comes down to, with declines, know thyself. We can talk about that as well. I think we're going to talk even more about declines, right?

Hill: Yeah. We've been getting questions emailed to us and tweeted to us. We're going to get to some of those questions. But I want to talk about one company specifically, and that's Square. There are a bunch of companies that are down, Square is really down. I mean, that's a stock that, just in the past week, is down more than 30%. Today comes the news Sarah Friar, who's the chief financial officer, is leaving by the end of the year. Sarah Friar, phenomenal leader at Square, helped take the company public. She's going to be CEO at a company, I think the company's called Nextdoor. Raised a ton of money, still private. Kudos to her. This is one of those things where it's like, she's so good at her job, and I understand why they are sorry to see her go, but this is one of those drops today where I just sort of look and I go, "Um, they're going to hire another CFO, aren't they?" Yes, it's a loss, but it seems like, at least in the case of Square today, a little bit of mania, in terms of the selling.

Fischer: Sarah Friar must be feeling good today. Like, "Hey, I matter!" She does matter, a lot. She's been there since 2012. As you said, Chris, she's really taken them from start to now. And she's a more strategic CFO than many frequently are. You can tell in the conference calls that she has a hand in the direction of the company. All the many business units that it has have needed a unifying person at the top. Along with the CEO, Jack Dorsey, she has been that. So, they're losing a key person on the staff. That's true.

But, they will have her replaced, hopefully by December. She plans to be there through December. The stock, I'm encouraged that it's volatile. We've seen in the past, when a company does as well as Square has done, share price-wise, it was $20 about a year and three months ago. It ran all the way to about $100. Now, it's back around $70.

Hill: Mid-60s today.

Fischer: Oh, it's been five minutes, it's down another $5. It's not surprising to see that kind of volatility. It's a $37 billion market value company. It's still small-ish, although it's not small by any means now. It's doing a lot of things right. They do point out that, of all their main divisions -- they have processing, they have hardware, they have software, they have finance and things like delivery, Caviar -- all of those divisions have their own sort of CEO at the head of them. There is a lot of disintermediated leadership and then unification at the top. 

I think they shouldn't miss a beat in their operations. This is clearly a loss, but congratulations to Sarah Friar. It's relatively rare, I saw a report, only 6-7% of CFOs go on to become a CEO of a meaningful company. 

Hill: We're basically getting two types of questions. One has to do with selling, and one has to do with buying. Let's start with the selling. Certainly, we're seeing that, on an institutional level, that's part of what is fueling this drop. Whether it's mutual funds, hedge funds, whatever, you've got companies that bought Square when it was $20, it runs up to $100, and they think, "Well, you know what? We're going to lock in our gains. We're going to take some money off the table." Choose whatever cliché you want. So, that's a question that we're getting from some folks. "I bought Amazon when it was at $500 a share. It ran up to $2,000. Now it's at $1,700, so it's fallen back from that, but it's still a tremendous win in terms of an investment. Should I sell?"

Everyone has their own situation. We can't speak to everyone individually. My question for you is, what process should investors go through when trying to make that decision? When trying to answer the question, "Should I sell this stock that I have made money on?"

Fischer: Such a great question! It really encapsulates the challenge of investing as a whole, and the challenge of living your life in the moment vs. for the future. Especially when you have invested time that has turned into capital, and you don't want to lose that, neither the time nor the capital. So, yeah, you bought Amazon, say, five years ago at $500. It's lately $2,000 per share. Great gain! Do you take it?

It does come down to a few questions, the way I see it. One is to know yourself, and know why you're invested in that company. If you no longer believe in the company itself, it's a pretty easy choice to get out. Pay your taxes if you have to. If you don't believe in it, don't stick with it. 

If you need the cash within three years, you should always sell. You shouldn't have money in the market that you need within three years. That's just been a Fool golden rule since inception in 1993.

But beyond that, if you weren't going to randomly sell a stock at a higher price, why would you now randomly sell it because it's at a lower price? Check your emotions and try to see if you're just nervous, you're worried it's going to keep falling, naturally. But are you living too much in the moment vs. living for the future? Where do you see Amazon in three to five years? I always try to think only in terms of three years. When I look across my portfolio, I look at each company and think, "Where do I see this in three years?" I don't really care about right now, as long as they're doing well right now and on a path that I believe in. It's, where do I see them in three years? If you can't make a strong case in your own mind, in your own numbers, and looking at the world as a whole, and your company in it, for why that company should be much larger in three years, then you have to start questioning, "Why do I still own this?" 

But other than that, just because the market is volatile, that is not an argument for selling it. It may be an argument for buying more of the best companies out there. 

Hill: The other question we're getting is about buying. We encourage people to have a watchlist of stocks for opportunities like this. If you've got a little cash in your account, if you've got a watchlist, and now, all of a sudden, the stocks on your watchlist are 10% cheaper, 20% cheaper, whatever, than they were a week ago... It's great to see people with that mindset of, "I'm going to try and do a little shopping." How should people go through the process of deciding? A lot of times, we'll get questions, it's almost like in Fantasy Football, when people are like, "Who should I add to my roster this week of these three wide receivers?" Instead, it's "Alright, I have a little bit of money, I have these three stocks on my watchlist. Which one should I add?"

Fischer: That answer might change as the market changes day by day. You look at your watchlist, typically, on a normal, calm day, you have your list of favorites. You just want them at a lower price. But when you see the market start to fall, as it did yesterday -- and you guys did a good job talking about it yesterday, as well. And congratulations on 1,500 episodes, that's incredible!

Hill: Thank you! Thank you for being here for part of those!

Fischer: I think I was here for 33 of those. 

Hill: [laughs] You've been here for more than that!

Fischer: Maybe more than that. We need big data. How many have you hosted, of 1,500? Obviously some 90%.

Hill: Here's the thing. Someone asked me, essentially, about looking back. It is sort of wild to think back to January 2011, when we started. I never would have imagined 1,500. And people were very nice and congratulating and saying, "Here's to the next 1,500!" What's weird to me is, when I project forward, and I think "Oh, wait, if we do another 1,500," and there's a very good chance that we will do another 1,500, "I don't know if I'll be the host in another 1,500 episodes." 1,500 episodes from now, I'm going to be within just a few months of my 60th birthday.

Fischer: No!

Hill: Yes! I've done the math on that!

Fischer: How? You look far too young! And I'm in the same boat, by the way. [laughs]

Hill: I appreciate that. But, that was the thing that weirded me out this morning. I was like, "Wait a minute!"

Fischer: Seven years from now!

Hill: I was like, "Oh my gosh, I'm going to be in the back half of 59 years old, staring down 60."

Fischer: Yeah, but that's the new 30. By the time we're 60, 60 is the new 30. Let's hope! One thing that you talked about yesterday -- brilliant way to tie it all back in.

Hill: Thank you for getting us back!

Fischer: It's diversification. When you look at your watchlist, you may find that you have a lot of like or similar companies. I do. I'm very tech-oriented, very software-driven. They're all getting clocked. In one sense, that's good. I may want to buy some of those that have been hit so hard. But, if you think there's more declines ahead, you might want to instead look on your list for companies that are not falling as much. Maybe they're defensive, healthcare, pharmaceuticals, who knows what, energy. Maybe buy those instead, so that you diversify your portfolio a bit. 

Look at all of your holdings. If they're all moving together, try to buy something that won't be in the same boat. You want to add a little diversification to your price movements. There are studies that show that today's leaders become future losers for a while, laggards for a while, and the current laggards become leaders for a while. They transition. It's commonly called rotation. To the extent that it's actually worth worrying about that, look into it. But, for the most part, as long-term Fools, we just want to buy and own the best companies we possibly can for the next three to five years and much longer.

Hill: I love the idea of thinking about it, not so much in terms of stock price, but just category, and looking and saying, "OK, I've got some tech, I've got some healthcare. I have no energy stocks, so maybe I should be looking at energy," that sort of thing. In terms of the price -- you and I chatted about this yesterday. I haven't looked closely enough at Square. Square is down 30% this week. And for all I know, by some metrics, it may still be an expensive stock. So, in terms of the financials, is there anything in particular people should be looking at? Because of course, the easiest thing to do is just look at the price. "Well, the price is down. Everything I have on my watchlist is 20% lower. Now what?" What's the next financial metric people should be looking at?

Fischer: Another great question. This is a tough show! I like it! I like being challenged. If you own a lot of things in your portfolio similar to Square, which is hard to value, it's expected to make $1 per share or so in the next year or so, so it's at some 60X forward earnings. To one extent, I think that's important to look at. To another extent, it's like looking at Amazon in 1999. Who cares how it's valued at that point? You just look at the market cap, which was incredibly small compared to where it could go. Square at a $37 billion market value still has a much larger market opportunity ahead of it. We do believe that its profits will grow in kind as it grows sales. So, the valuation it has today could look quite inexpensive three years from now.

But, maybe a better answer to your question, Chris, is, if your portfolio is heavily weighted -- as many Fools' are, and there's nothing wrong with this, it's actually good long-term -- in things like Square and, say, Twilio  or even Salesforce, things that are at higher valuations, you might want to look to add something that has a more easily recognizable and estimable -- is that a word?

Hill: I think it is.

Fischer: A valuation that you can estimate more easily, both the results and the price. Look at something like Microsoft, which is growing strongly and not priced the way these other growth companies are, and add that into your mix.

Bottom line, I think, is to not just own one type of valuation category. Even if you're owning all high-growth stocks that all have multiples that you really can't fit onto a spreadsheet.

Hill: See, I knew I had the right idea asking you to be on today.

Fischer: Well, I want to talk a little bit more about how frequently markets decline. We've run through this in the past, Chris, but it's always a good reminder. This is the Dow Jones, but as we all know from Morgan Housel and others, the Dow Jones, amazingly, those 30 stocks track the S&P 500 almost perfectly. It's incredible!The Dow Jones, since 1900, falls 5% or more approximately three times every year. The average length of that decline is a month and a half. Three times a year, expect a decline like we've just had. It falls 10% or more approximately once every year since 1900. So, once every year, we're going to see a 10% decline. That's just typical.

That's why, as we said at the outset, you have to internalize that these declines happen. Have your list ready and then buy the companies that most appeal to you during the decline.

Then, a 15% decline, that happens approximately once every two years. A 20% decline happens once every three and a half years or so. The average duration of each decline, in every single one of these cases, is less than a year; typically much less, just a matter of months.

Declines, as we said at the outset, are quick. They're sharp, they're quick, and then the market slowly grinds higher for hopefully a long time. The market rises about three out of every four years. Keep that in mind. Intra-year declines are common. Expect to see many every year. Period. 

Hill: Jeff Fischer, thanks for being here!

Fischer: Thank you!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Monday!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.