In this episode of Industry Focus: Tech, our host Dylan Lewis speaks with Motley Fool premium analyst Ben Ra and takes a deep dive into the present sell-off. They discuss the importance of having a cash cushion, how you can prepare for such situations in the future, and what the recovery may look like. They also have a few stocks for your watchlist.

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This video was recorded on Feb. 28, 2020.

Dylan Lewis: It's Friday, March [Feb.] 28, and we're talking about the market sell-off. I'm your host, Dylan Lewis, and I'm joined by Motley Fool premium analyst Ben Ra. Ben, it's been kind of a rough week.

Ben Ra: Yeah, it's been rough. They're calling this the worst week since 2008, and I mean there's a couple of arguments that you can make. You can make the argument that it's a buying opportunity. There are definitely a lot of people who think, well, prices are getting better now and the prices were so high for such a long time, and now things are coming back to earth.

So some people think of it as a panic. I wouldn't really call it a panic when there's people who actually think of it as an opportunity. I think in the real panic, you have people who are really hating life and who really want the past trends to continue. I don't see that now. I really don't see this as a panic. I think when you look at the market, last year it went up, like, 30% -- 33% if you include dividends. A lot of that was really multiple expansion. It really wasn't earnings dramatically better than 2018. So you can characterize this as the market just kind of coming back to earth in a way.

Lewis: Yeah. And, I mean, it's easy to be level-headed here at Motley Fool HQ, because we're surrounded by so many people who are saying this is a buying opportunity, or we're prepared for this; we understand that we're going to have those years when the market is up 30% and the years where markets maybe down 5% or more. I think it's a little tougher if you're out there doing it on your own.

Ra: Yeah, absolutely. I can definitely understand the panic that could set in when you put in a significant amount of money and the next day, you're losing 5% of it. And then the next day it's another loss. But one of the pieces of advice that I've heard is that you're not really losing unless you sell. So the importance of knowing that the stock market is going to move up and down all the time and there are going to be days like this, it's really a matter of just keeping your head clear and not doing something just because the market seems to be telling you to do it or not buying or selling based on the headlines, which is very tempting to do these days.

Lewis: Yeah. And I think this time is also a good moment to kind of check in on the idea of the diversification of time. We spend so much time when we're talking about investing, talking about diversification, and people tend to think about that, you know, owning a lot of stocks or owning mutual funds or index funds, but there's another element to it, and it's when you decide to put your money to work for you. And if you're tying your cost basis, whether it's a mutual fund or stock, to a single point in time, you are subject to whatever the market's whims are at that moment.

And I think that this is just a great reminder that if you've got $10,000 and you're trying to invest it, don't do it all at once. Kind of sprinkle it out over the course of the year. And a lot of people do this anyway with their 401(k) or their 403(b) and they don't even realize it, but every paycheck, you know, 26 times a year, something like that, they're investing in the market. And it's one of the easiest ways to spread your bets and make sure that you're not too anchored to any one moment.

Ra: Yeah, absolutely. I mean, if you can time the market, you know, time the market, if you know how to do it. The problem is nobody knows how to do it. So by averaging out over time -- dollar-cost averaging is the official way of describing it -- if you do that, then it sort of kills the effect of timing. And the key to long-term investing, the Foolish way of investing, is you never know what exactly when it's going to happen, but you know what's going to happen, you know which companies are going to win. But when exactly all these things will transpire, that's a mystery. So the key, as you said, is to divide up your bets over time.

Lewis: Yeah, 100%. And it's a lot easier to say these things academically than to practice these things. I think what's so hard about a large market sell-off, is you're either prepared for it or you're not. And if you're not prepared, there's not a ton you can immediately do to get yourself there, and so this will not necessarily be the most actionable advice for folks that are feeling a little bit more panicked, because they put a lot of money into it. But that's why we espouse so much, if you're going to need it in the next couple of years, it probably doesn't belong in the stock market.

Ra: No, absolutely. It is very important to have a cash cushion. And Warren Buffett calls cash an option on all assets. So it's very nice to have that at all times. Now, what percentage of your portfolio should be cash is really dependent on your personality, your situation, but it is important to have that cash cushion that you can utilize in a moment like this. And a moment like this, I think, really kind of gives us, reinforces a lot of lessons, one of those being keep cash. Try not to put your cash into depreciating assets like a car. This is probably not the best time to make that kind of purchase. Watch how the market unfolds, and you may find better opportunities than a Mercedes-Benz.

Lewis: [laughs] Yeah, and I think what's also been a little scary for folks is, when you see some real volatility hitting, you expect the market to sell off, but you will look to the stalwart companies and expect them to continue to do just fine. And I look to -- you know, Microsoft sold off 10% over the past week. Surprisingly, Apple didn't. They were only down about 2%. But this is something where it's not necessarily just the high-growth SaaS companies that are trading at crazy multiples that have sold off. A lot of really big names have.

Ra: Yeah. There's also a lot of companies that have actually benefited. You look at, like, Clorox -- 3M, I think, has benefited. So I mean, generally speaking, I'm very much against this business of buying any kind of coronavirus stocks. So, best-case scenario, say the virus just goes away in a month's time and you've bought these stocks that supposedly were supposed to benefit from the coronavirus -- say something like a Clorox. So after the coronavirus goes away, are you going to keep on holding these stocks? Are those stocks going to go down because now the coronavirus has gone away and you're left holding these stocks that you didn't like before, but now you have? Are you going to sell them?

So I would say look at those stocks that you liked before. And the stocks that you liked before are probably stocks that benefit from long-term trends. And I think the effect of the coronavirus, if you look at it over the long term, will be to sort of reinforce and strengthen these long-term trends. So one of those trends, I think, is something like the virtual world. So people live much more in the virtual reality than in actual reality. So these stocks that we say, well, you know stay-at-home stocks like Netflix, they all benefit from that long-term trend. And that long-term trend has existed before. I think this is something that just sort of reinforces that.

And when you look at sort of the effect of the coronavirus on supply chains, some people say it's going to kill globalization. There's this backlash against globalization that's been going on for the last couple of years. I would say that what's going on is more of a diversification of the supply chain away from places like China. Much more difficult to do now, because you have so many different countries that are affected by the virus. But it's necessary for these companies to exercise some flexibility when it comes to their supply chains. So as a continuing effort to have more flexibility in the supply chains -- so any company that really deals with that, that can automate business practices and automate the supply chain, could benefit over the long term, it could benefit maybe immediately from the coronavirus, but also after the coronavirus it'll benefit from these long-term trends.

So you really have to think about the world after this epidemic, because it will end at some point.

Lewis: I like the way that you're parsing that, because you know what we really look for is tailwinds, and we look for significant tailwinds that will drive stocks for a long time, that will give companies plenty of room to run. And when I look at something like this, it's a shock to the system. It's maybe a short-term tailwind, but it is not a long-term tailwind. The investable element of this is the supply chain changes that you're talking about. And I think there's probably a lot of really great lessons for investors bundled into all of that as well.

I think also, the companies that are going to be bit a little bit more by this are the ones who have those supply chain issues.

Ra: Yeah, definitely, if you're selling a product, if you're selling a thing, it's difficult for you because a lot of manufacturing just takes place in Asia, and China in particular. So yeah, if you're in that situation as a company, it is difficult. And the other thing is, when the coronavirus ends, and I believe that it will end definitely, will demand just spark up and will it be a V-shaped recovery, is sort of the way that analysts talk about things. But will it be an immediate spike in demand is one of the questions that we can sort of think about.

And I would lean toward the negative in that aspect. I mean, just the fact that you're living in a more virtual world, I think, means that when there is a recovery, people will be slow to actually get out and buy things and go on cruises and go to the theater. They will have to feel absolutely safe before they start doing that. So that recovery in more physical experiences, whether it's products, whether it's going to the theater or going to concerts, that recovery, I think, is going to be a lot slower. And I would bet on it not being a V-shaped recovery.

That doesn't mean that those businesses are not good businesses over the long term. It may actually be an opportunity to buy over the long term. But, yeah, just that recovery, I would bet on it being a much slower pace.

Lewis: Well, anytime you run into issues with your supply chain, it's not something where you flip the switch back on, things start coming out and everything is where it's supposed to be. There's a lag, where you order products a certain amount of time before you actually need to sell the products, and any disruption of that is not just a short-term disruption, it's probably going to be something that affects them for a considerable amount of time beyond that.

Your talking of the virtual world reminds me a lot of this conversation I was having with Jason Moser the other day. And he was saying, "Yeah, I mean, the companies that operate in the digital space, there might be fears, there might be less consumer spending, but they aren't disrupted by this in the same way, because it's not affecting physical inventory for them."

Ra: Yeah, I definitely agree with that. I would also say that a lot of those companies, I mean, the valuation has definitely gone up a lot. So, immediately, there is some risk there. The top four companies, the trillion-dollar companies -- I'm not saying all of those are virtual-world companies -- but they do benefit in a very significant way from this trend. I mean, those companies have done very well over the last few years, and they constitute close to $4 trillion of market cap there versus $21 trillion of GDP. So it's almost 20% GDP right there just tied up in those four companies. So there is some price risk there in the short term, but I mean the long term is a very different story.

Lewis: We can't talk about this being a potential buying opportunity without throwing out some interesting ideas for people to kind of keep on their watchlists. I am so crushed and disappointed personally because, listeners might know, I'm in the process of buying a house. And so, from an interest rate perspective, fantastic, but I also can't deploy cash the way I normally would when I see the market sell off 10%, which is a bummer. I'm sure, though, there are a lot of listeners out there looking for a couple of ideas. And so I want to bring in and talk about some things that you think are particularly interesting right now.

Ra: Yeah, I mean, so going back to the automation of business processes, just the difficulties and complexities that will happen because of the supply chain disruptions, there is -- I mean, the biggest consultant, Accenture (ACN 1.30%), I think, is a very interesting one because their stock actually has gone down. I would say the coronavirus and just long-term trends of business automation actually helps Accenture. What they provide, I think, will become even more necessary. Over the last five years their stock has gone down. It's a possible opportunity. I'm not saying buy just because the stock went down. But I would say the long-term future of that and even the immediate-term future of Accenture is quite positive, even though, in the very short term a lot of their business demand may die down a little bit, but speaking long-term I do like the business a bit more.

Lewis: I remember, I had a conversation with John Rotonti, one of our other analysts -- it might have been two or three years ago -- and he was saying that Accenture is one of the easiest ways to blindly bet on tech. Because they are consultants, because there's not one megatrend that they have working for them, they are going to be wherever companies need tech implementation and tech consulting. And so, kind of, no matter where the industry goes, they're probably going to be making money off it.

Ra: Yeah, absolutely, I completely agree with that. Yeah, nothing more to that.

Lewis: [laughs] Do you have another one for us, Ben?

Ra: So there's a company called Everbridge (EVBG). I don't know, maybe a lot of our members may not be familiar with it. But it is a software company. It sells what's called critical event management. So this ties in a little bit more directly to the coronavirus outbreak. So it's a company that, where if an employee, for example, is in danger or is in a danger area, it sends out basically -- it's a mass messaging system that companies use to notify their employees about what's going on. So of course, it ties in very directly. If some employee gets infected, this sends out a message across, whether it's phone, email, chat, it makes sure that if you're an employee of that company, you know what's going on.

So this is something that companies have been using more and more. I would say that because of the coronavirus, it becomes even more important for companies to have some kind of solution similar to what Everbridge provides. We ourselves at The Fool, we have a solution, I forget who the provider is, but it is a market that I think is expanding.

Lewis: Yeah. And unfortunately, there are a variety of reasons why companies need that type of messaging service, and sadly, I don't think those reasons are going anywhere.

Ra: No, you know, the typical one that people think about, of course, is mass shootings, but not just mass shootings, there's all kinds of -- you know, there's floods, there's storms, there's just all kinds of dangerous things that that can happen and that require this kind of mass communication tool.

Lewis: Yeah, I know we've used it at Fool HQ for things that did not seem all that crazy, but the peace of mind that comes with being able to use a system like that is absolutely fantastic. That's kind of the story behind the stock. A couple numbers or anything like that, that kind of help paint a picture?

Ra: I mean, in terms of stock has gone up like 25% because of the coronavirus. I'm not saying buy because of it, but it has actually benefited. And it's a stock that I've been looking at, I would say, over the last couple of years. And it's an interesting one. I wouldn't say you just buy because of this, but it's just one to keep in mind.

Lewis: One to watch.

Ra: Yeah.

Lewis: All right. Ben, thanks so much for helping on today's show, giving us a rundown. Hopefully -- I mean, you have such a calm, relaxed demeanor to you. I hope that listeners were able to get that sense. I certainly get it when we're in the studio together. Always happy to chat with you.

Ra: Awesome! Thank you.

Lewis: Listeners, that's going to do it for this episode of Industry Focus. If you have any questions, you want to reach out and say "Hey," shoot us an email, [email protected], or tweet us, @MFIndustryFocus.

If you're looking for more of our stuff, subscribe on iTunes or wherever you get your podcasts.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear.

Thanks to Austin Morgan for all his work behind the glass today. For Ben Ra, I'm Dylan Lewis. Thanks for listening and Fool on!