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What to Make of a Market "Circuit Breaker"

By Chris Hill - Mar 16, 2020 at 2:48PM

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It's an exciting time to be an investor.

In this episode of Market Foolery, Chris Hill chats with Motley Fool analyst Jason Moser about the markets breaching the circuit breaker limit. They rely on their experience to bring you some insights on how you should manage your portfolio going forward. They also answer some listeners' questions. We are ramping up things over at The Fool, get all details and much more on today's show.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on March 9, 2020.

This video was recorded on March 9, 2020.

Chris Hill: It's Monday, March 9th. Welcome to MarketFoolery. I'm Chris Hill, with me in studio, it's Jason Moser. Thanks for being here.

Jason Moser: Well, thanks for having me.

Hill: Holy cow, is it ugly out there!

Moser: [laughs] I feel like maybe the opening today should be some really somber music, instead of that upbeat, sort of, alright, MarketFoolery's da-da-dada. [laughs]

Hill: Yeah, see, unlike the cable networks, we don't have the breaking news orchestra on standby, ready to do the dramatic music, and if we did, today would be a day to do it, in all seriousness, because the market opened this morning at 9:30. And I think we're about 10 minutes into the trading day when the circuit breaker was tripped because of how quickly the market fell. And it reminded me once again of David Gardner's comment of just how quickly stocks fall, when they fall, and I'm going to butcher the comment, but it's essentially, "they fall faster than they rise, but they rise more often than they fall." But today, they're falling quickly.

Moser: Yeah. And, I mean, certainly technology has enabled that to a degree. You see knee-jerk reactions. They happen more quickly. Information flows more freely; even that information is not correct all the time.

Hill: Institutional trading.

Moser: Yeah. I mean, it's just a lot all at once. And the other thing to remember is, we sort of knew this was coming when we were going to bed last night, right. Like, you're hitting the sack last night seeing your phone light up, saying all the futures are down 900, 1,000 points. Well, it didn't take a genius to figure out, this was probably going to be a tough day. And all of that pent-up fear ultimately results in what we've seen this morning, whether it's rational or not, is for another debate entirely, but as they say, it is what it is.

Hill: So, we're going to get to some questions that we've gotten from folks on Twitter, but I was thinking this morning that I think if you're an investor, depending on your age and your timeline, there's a question that you need to answer on a day like today. For context, I'm 53 years old. I think, if you're an investor and you're older than me, the question that you're facing is, "Now, that the 10-year bull market is over, and I am presumably closer to retirement, do I want to start taking some of my money out of the market?" I think that's, if you're older than me.

If you're younger than me, I think the question is even more basic and it's simply, "Do I want to do this?" If you're an investor, particularly, not just young, but young to investing, if you've only been investing in the stock market for a few years, you're completely forgiven for being more shaken by what's happening today than grizzled veterans like myself and you; although you're less grizzled. But I think this is a question for newer investors, "Do I even want to do this?"

Because when we talk about temperament, it's all theoretical until you face a day like today and you look at your portfolio and it's all red, and that's when you have to be as honest as you can be with yourself to say, "Do I have the stomach for this?"

Moser: Yeah, and let's say, we've got some good news, the market's bouncing back a little bit, it's only down about 1,250 points now. And, of course, I'm kidding, I mean, that's still bad. But I think, to your point there, investing is very much an exercise in intestinal fortitude. You have to have a certain ability to, I don't want to say ignore what's going on but to accept the process, to accept how investing works. I mean, these things simply happen. It's easy for me to say that, it's a lot more difficult for the person listening to then be able to process that and figure out how to handle it, how to develop the mental models or whatever it takes to be able to deal with that and see the forest for the trees, not everybody can do it.

And I totally understand that, we're not asking everyone to do it. I think, in a case like this, for example, it makes a lot of sense for most people to simply invest in something like an S&P index fund and just dollar-cost average into it over time through their job or if they don't have that ability through their job, then you can do it on your own. You can look at days like today and say, "Wow! that's a big drop." But the whole point of doing it week-in and week-out, every time you get paid is that it helps smooth out lumpiness, like you would see from something like today.

And as bad as today seems or feels, all you have to do is stretch out that timeline and look at the last 10 years. Go a little bit further back. Go to 2005. And you see that period of the financial crisis, which at the time was, that was the most serious market I had seen to that point, and probably you too --

Hill: It was every bit as painful as what's happening right now. For anyone who is new to investing, and investing during the Great Recession was theoretical or just something you read about, take it from two people who were there at the time, every bit as painful and scary as what's happening now, albeit for different reasons, but there were a great number of unknowns.

Moser: Yeah. And, I am glad you said it, because this does feel very much like that. I mean, we're obviously, officially in a correction. We're very close to straight up bear market, I mean, that's not far off horizon and I think we're essentially there; it'll be just a matter of time, in my opinion. I think that by the holiday season, I think, we're talking about the recession that we're in. I don't understand, given what has gone on with coronavirus concerns alone, how we don't witness, at the very least, a mild recession from this, but we won't know for at least another quarter-and-a-half or so.

But you have to be able to look at these points in time and say, "You know what, this is just part of the game." It's not a game, I mean, I don't like to gamify. It's your money and it matters, obviously. But when we talk about investing and we talk about doing it for long periods of time, our lifetimes in most cases, these are the types of things that come along.

And I look at what's going on right now, and like you said, this is much different than the financial crisis, in that, it's not based on these newfangled securities in a sinking housing market. We've got the coronavirus, which there's still plenty we don't know about. Obviously, oil prices have just taken a turn for the worse. That's two. They say, "Bad things come in three," so what's the next thing coming along?

I mean, I would ask you, just as an investor, what's the next bad thing that comes along? Because I started thinking about that this morning and I think there are plenty of things to at least take into consideration.

Hill: I think there are. I don't want to speculate on what they could be, but it can range anywhere from small- to midsize businesses declaring bankruptcy, to something involving the housing market. But I think that -- I'm glad you mentioned what's happening with oil, because that is another X factor over the weekend. And someone asked me this morning like, "How do you think this is going to shake out between Russia and Saudi Arabia?" And I said, [laughs] "I am not smart enough to even guess at how a dispute over oil between those two places is going to play out."

Moser: Yeah, that's just a total guessing game. I mean, I'm not a commodities expert by any means, and I don't know what went on in those meetings to spark this type of sell-off here, but the fact of the matter is that, to me, I look at this and I say, "Okay, well, coronavirus, oil prices, well, what's next?" I mean, if we're on the cusp of a recession, just this fallout in oil alone, there are going to be a lot of jobs that disappear from this, either temporarily or permanently, it's some combination thereof.

There's a lot of consumer debt outstanding right now. I mean, consumer debt has really -- credit card debt rose to a record in the final quarter of 2019. Total credit card balances are close to $1 trillion. I mean, think about that for a second.

Now, we're at a point in time where unemployment is the lowest it's ever been in 50 years, and that's great, but you know what else it means? [laughs] It means, it is not going to get much better. And if people start losing jobs, then the unemployment rate starts creeping back up. You compound that with things like coronavirus fears, which is going to, I would think, certainly, stanch consumer spending for a longer period of time, you can do all you want, monetary policy and argue that lower oil prices mean that it's easier on the consumer's wallet, but if people don't want to go out, they're not going to go out, they're not going to be spending as much money.

So, it's just all the say that, if we run into a situation here where unemployment starts rising, we feel, folks with more pressure on wages, they're unable to service the consumer debt that they have, they can't fuel more spending with the consumer debt that they were fueling that spending within the first place, you can just see the ripple-on effects here that play out over the course of time. That doesn't mean that everything's going to hell in a handbasket, but it does mean, "Hey, listen, we've got a little bit of a culling going on right now. We're resetting the bar."

And a lot of us probably feel like, it's about time, there's been a lot of speculation going on in the stock market, that's built up a lot of stock prices for companies that haven't really yet proven themselves fully. So, this is the nature of the game, so to speak. It doesn't mean that everything is coming to an end, what it does mean is you need to figure out yourself what you're able to tolerate and then you need to invest accordingly. If you can't deal with something like this, then you need to say, "Okay, well, maybe investing in individual stocks isn't really the thing for me," just invest in an S&P index fund and just, kind of, go on your merry way.

Because, again, you look it over long stretches of time, that philosophy works out very nicely, and it saves you a lot of stress along the way.

Hill: Let's get through a couple of questions that we've gotten on Twitter. First from Shawn Thomas, who asked, "If I've put some money aside, is this a, 'we buy the dips' scenario or do I continue to add to cash reserves for the time being? I'm not trying to time the bottom, just the first movement I've seen like this in a single day since I've been investing."

Great question, Shawn, and thank you for that. There are a couple of things I really like there. One, his acknowledgement that, "Hey, I'm relatively new to this and I've never seen this before," the self-awareness. That he's put some money aside, but that he's also thinking in terms of like, "Well, wait a minute! I've got some money, do I want to deploy it right now or do I want to, you know, save it up for worse to come?" And this is, again, this is why we talk about having cash. I know that there are people who like to be fully invested at all times. I always like to have a little bit of cash.

Moser: Yeah, I do too. And one of the big lessons I took away from the financial crisis in 2008-2009 was just that, making sure that you have cash at the ready. To me, that's always just -- I don't care about maximizing whatever little return you can find on cash, to me, the liquidity is by far and away the best return of all. And what we've seen now is with commissions essentially a non-issue. I mean, commissions are just no longer even something worth considering, because essentially all of them zero. Now, you can really take it slowly.

And I think that's the key, and that's why I like this question from Shawn, not only because he's asking about, sort of, this buy the dip mentality, but also just acknowledging, "Hey, this is the first time I felt this." And like most things, I mean, once you go through something, that experience teaches you more about how to deal with it in the future.

And I think that you take little lessons away from times like these. One of them that I took away years ago, was to go slowly. And I think now you have the opportunity to go even more slowly, you don't have to feel like you've got to put it all to work at once. You don't have to try to come up with a certain amount, so that you're keeping it around 2% of your total, you're keeping your commission costs around 2% of your total transaction, because commission costs aren't a consideration anymore.

So, I think these are the times when you start buying a little bit here and there the companies that you really like, but go slowly, it is not a sprint, you're not trying to beat someone to a finish-line. Given everything we know today, given what we know could potentially be coming down the pike here in the next couple of quarters. I think it's reasonable to assume things are going to get worse before they get better, and that's alright, this is where the money is made.

So, yeah, good question, Shawn. And I would just encourage you to take it slowly.

Hill: Well, and to his point about not trying to time the bottom, there are stocks that you can have on your watchlist, a month ago, the stock was at $30. Today, it's at $22. And you can look at that and say, "Well, I was thinking about it at $30, well, now that it's at $22." Just know, to your point, that stock can go to $12, before it gets back up above $30 again. It may be a great long-term buy, just know that in the short term, it might be going to $12.

Moser: Yeah, there's no question. I think, if you're going to invest in individual stocks, one of the things that you need to condition yourself for is to simply accept the fact that you can buy shares in a company and over some period of time that value will be cut in half, can you stomach the value of your investment getting cut in half? If you can, great, keep on moving forward. If you cannot, you need to reconsider your investing philosophy and strategy and maybe become a little bit more conservative so that you're not stressing yourself out.

Hill: Before we get to another Twitter question, I'm curious if you look out at what's happening in the market today and think to yourself, there are certain parts of the market that I want no part of, no matter how cheap they are. There are people who are looking at -- I'll just name two. The cruise line stocks, which have been cut in half since the beginning of the year. And as we talked about earlier oil and gas. There are people who are looking at ExxonMobil, and saying, "Boy, you look at that dividend yield! Holy cow! It looks great now." I'm not trying to lead you into those two, but just give them as examples. But are there parts of the market that you're just avoiding altogether?

Moser: Yeah, I mean, there are plenty. I've said for a while, energy is just something that I don't really mess with. To me, it's just too cyclical, there's too much timing involved. And, obviously, you see news like today, you just realize, there's a ton of stuff that's completely out of your control. I mean, you can invest in really good businesses that still succumb to just greater forces at play. And so, I've just always avoided energy for that matter.

The one I talk about Motley Fool Money of this past week, you know, and I don't have a lot of exposure to restaurants. I like restaurants in general, because people got to eat. And when you find a good restaurant concept, and they can do really well over a long period of time. I think that restaurants right now are pretty scary along with a lot of those travel related names that you mentioned.

But you look at some of these restaurants. This is before today, but Darden was down 20% over the last month, you're looking at Bloomin' Brands down 20%, Brinker International down 28%. That all makes sense. I mean, people aren't going out as much. Those restaurants suffer when traffic falls. Traffic is imperative to restaurants because they have a lot of those fixed costs involved with just keeping the operation open.

So, for me, I feel like those are sales that they're never going to make up. So, if you feel like we have some tougher times to come, then maybe restaurants will be the ones to steer a little bit clear of for now. I mean, I'm not saying restaurants are a bad investment, but I don't know that I'd be sinking any money in any restaurants right now, because I could see them dealing with some traffic issues for a number of months to come because of this.

Hill: We got a question on Twitter from Mitch Dingwell, writes, "Holding strong, taking dividends in cash and squirrelling away as much cash as possible. Once the dust settles, I'll be adding a couple of new companies, but mostly bulking up on existing positions that got a bit heated. MasterCard and Visa, Amazon and Google [Alphabet] weren't crazy to start with."

I like this, although, I would love for Mitch to tell me when the dust has settled, [laughs] because that's the part of that comment that, I'm like, "Umm, has the dust settled?" I'm sure there are some people looking at the market today and thinking, "Well, come on! Tuesday is not going to be worse than this, is it?" [laughs]

Moser: Well, maybe Tuesday won't be, but maybe next Tuesday will be. You never know, I mean, it can always get worse. I think that's the one thing, I just walk into investing and just knowing that, "Hey, as good as things can be going, they can always get worse." Always expect the unexpected.

And, the one thing I really like about Mitch's tweet here -- because, yeah, I agree that once the dust settles, we will only know that until after the fact -- it just reminds me of that old Peter Lynch axiom that "Usually the best stock to buy is one that you already own." And the basic idea is, "Hey, you already own it, you own it for a reason." And a lot of times that stock is going to be better than the third, fourth or fifth one you have on your watchlist.

And so, that just always led me, as an investor to, you know, when I'm building a watchlist, I like to build a watchlist off of the companies I already own. Now, if you only own five stocks, if you're relatively new to investing, that's not going to really work for you. Because ultimately, we want you to get to 15 to 20, maybe even 30 holdings as a Foolish investor. That's well-diversified. That can let you sleep at night.

But if you have a portfolio of 15 to 20 stocks at this point, different holdings, you can really start looking at those companies and saying, "Hey, you know what, I want to add to some of these positions. I like these businesses, because I own them already and maybe some of them are clearly winning and doing really well." I mean, he mentioned some really good names there, MasterCard, Visa, Amazon, Google; I own all four of those myself. I look at those and I think, you know what, those are all four companies that I've considered adding to in this mayhem. And so, I do think, it just goes back to Peter Lynch saying of "The best stock to buy is one that you already own."

And if you have a nice portfolio of holdings already, build a watchlist from those holdings that you have and see if you can prioritize which positions would you like to add to? Because it's OK to add to it even if it's a positive returner for you already. I mean adding to your winners is a very positive and powerful mentality that you can adopt as an investor. One that I learned from David Gardner early on here, and I've never looked back on it, it's just been one of the greatest lessons I've learned in investing ever.

Hill: Let me ask you about home buying for a second, because I know you're not in the market for a new home, neither am I. But does what's happening with mortgage rates make you rethink that at all?

Moser: As far as purchasing a home?

Hill: Purchasing a home or refinance?

Moser: Well, I mean, yeah, for absolutely, I've already opened up the lines of communication with our lender in regard to refinancing. And mind you, we bought a new house two-and-a-half years ago, two years ago I guess, maybe two-and-a-half -- yeah, whatever, three years ago now. And we got a 30-year fixed rate loan at 4.375%, which at the time was just terrific, we're happy with it. I mean, I don't have to have the lowest rate, I just want a fair one.

And I'm looking at that thinking, "You know what, man," I mean, I know from my job in that line of work a while back, the rule of thumb was always to try to get a better point differential. So, if you're at 5%, if you can get it at 4% or less, then it's going to be worth your time. That's not always totally the case, but that's a good rule of thumb. And I am starting to look at that, thinking, you know what, we're getting close. And with refinancing, you can roll the cost of that loan into your overall loan, you amortize that over 30 years, you don't even really feel the closing cost.

And so, yeah, I've already called our lender. It seems like there's going to be an opportunity here in the near future if rates go even lower, which I think they might. And I think if you're a homeowner, you owe it to yourself to at least check this out because you'd be amazed. But, I mean, 30-year fixed rate loans are out there at 3.5% and lower, which is just phenomenal to think of. But here we are.

Hill: Let me just wrap up with this. First, thank you for listening. Thank you for hanging in there to all the listeners out there, because we know it's especially tough when it happens this fast. The last couple of weeks have been really rough. So, hang in there.

It's business as usual for our podcast. We're actually going to be ramping up what we're doing on fool.com in terms of editorial content as well as YouTube Live. David Gardner is going to be on YouTube Live later this week. So, if you're not already a subscriber of The Motley Fool's YouTube channel, which is free than just go to YouTube.com/TheMotleyFool and click the "subscribe" button. We're going to be doing at least one live Q&A with David Gardner this week, possibly more as things develop, but definitely get yourself over to fool.com for more editorial comment and Industry Focus, coming later today with Jason Moser.

Moser: You know it. Yeah, I'd say, man, David is one of those guys, when you listen to him, I defy you to walk out of that room, after listening to him and not feel good about things. I mean, he is a breath of fresh air. So, in times like these, you tune into that, because he's just a nice guy to listen to. [laughs]

Hill: [laughs] We need a little bit of that.

Moser: Yeah, absolutely.

Hill: It's almost like audio green, because you look at the market and it's all red and it's like, "No, I need some green." It's like, you know, David is audio green. Thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interests 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 MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening. We'll see you tomorrow.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon and ExxonMobil. Jason Moser owns shares of Alphabet (C shares), Amazon, Mastercard, Twitter, and Visa. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Mastercard, Twitter, and Visa. The Motley Fool has a disclosure policy.

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