In this podcast, Motley Fool senior analyst Jason Moser discusses:

  • Short-term catalysts, long-term trends, and why it's OK to invest in both
  • The importance of understanding how a business makes money
  • Reasons to sell a stock

Motley Fool analyst Deidre Woollard looks back at the bear market of 2020 with Liz Hoffman, author of the new book Crash Landing: The Inside Story of How the World's Biggest Companies Survived an Economy on the Brink.

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.

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This video was recorded on March 06, 2023.

Chris Hill: A look back at the crash of 2020 and a closer look at when to sell. Motley Fool Money starts now. I'm Chris Hill; joining me today is Motley Fool senior analyst Jason Moser. Happy Monday.

Jason Moser: Hey, happy Monday.

Chris Hill: We got an email from longtime listener Will Martin. It was a very nice note that included a shout-out to you. I'm quoting here, special thanks to Alison Southwick and Robert Brokamp. Four years of great personal finance advice. I'm not going to read the whole thing that Will wrote because it's pretty lengthy. But the investing questions from him boiled down to a couple of key things that I think apply to all investors, and it has to do with investing thesis and sell signals.

Let's start with the first one there. He asked as much: What guidance do you have for an investing thesis? We're investors who focus on businesses, so feel free to use any business as an example. But when you're looking at a business, Jason, how do you come up with your investing thesis?

Jason Moser: This is a good question. Ultimately, the investing thesis is more or less your case, the reason for investing. For me, it always has broken down into two different scenarios. I know that we here at the Fool are very long-term, sort of buy-to-hold focused. I don't say buy and hold. I like to say buy to hold because you've got to keep up with the story, Chris. It's just not like buy it and set it, forget it. You got to keep up with the story.

But there is that buy-to-hold mentality versus something else. Maybe some people will call that value investing. Maybe some people will call it trading. Obviously, we're not going to call it trading because we're not traders here. But when it comes to looking at the actual thesis, I break it down to either being the short-term catalyst or the long-term trend.

They are two very different concepts. You're looking for something that is going to drive this business forward. Then you're trying to further figure out what is going to drive this business forward. Is it some type of short-term catalyst, some headline or decision or policy? Or is it a long-term trend that the company is playing into that makes more sense? Now, a short-term catalyst? No surprise, that's going to be something that is a bit more short-term in nature.

Perhaps some people would be able to relate to this if we just pose it as a value investment. I think of energy, oftentimes, as something that fits into this box pretty well because the energy being so volatile changes along with economic conditions.

You could see a short-term catalyst that might drive energy prices higher over the course of the coming year or two years, and then you might make an investment in an energy-related company based on that concept, based on that notion. That's something that's a more short-term catalyst in nature versus something like a long-term trend where we talk a lot about 5G and connectivity. I think on this show and the services that I run, we're focused on those concepts. 5G, for example, is something a bit more long-term in nature. We're talking about essentially a decade where this idea is going to play out and present a number of different types of opportunities.

For me, really figuring out that thesis first and foremost depends on whether you are looking at this through the lens of a short-term catalyst versus a long-term trend, and both are acceptable. I will say that I think that the long-term trend is easier because you're taking that longer-term view; you're letting time work to your advantage.

The short-term catalyst is a bit more specific in nature. You're depending on one thing or maybe two things to happen, and if they don't, that could certainly alter the shape of that investment idea. It's worth keeping that in mind. I invest with both strategies. I'm not a value investor, per se, but I definitely take maybe a shorter-term timeline with certain investments based on that short-term catalyst idea.

Chris Hill: Underlying that, when I think about this question, I go to an even more basic place. And I loved the comparison you made between short-term catalysts and long-term trends. I think a key part of having an investment thesis is, do you understand the business?

Jason Moser: Yes.

Chris Hill: Do you understand the path that this business needs to take either to growth or profitability, ideally both? But those I think are almost table stakes for any investing thesis.

Jason Moser: I would agree. For me personally, I don't like investing in businesses that I just don't understand. If I don't understand what they do, it's really difficult to make a case that you understand how they make money, and then, further, what's going to drive growth or drive this business to new heights in the future.

A very good example, I think, is if you invest with your kids. I got my kids started many years ago when they were much younger than they are now. But that was essentially the first question that I would always ask them. I would say what does this business do? It was just as simple as saying, well, Starbucks was one of their first investments.

I think their first investment was Disney. They certainly understood that one pretty clearly. But Starbucks -- a very good example -- just, hey, what does this company do? How do they make money? It was as simple as them just looking at me and saying, you know what, they sell coffee to people for money. As simplistic as that is, that really is it.

That's the crux of it. It's not like you have to go into some real deep dive to explain the drivers of revenue and what's going to change the margin picture in the coming years or whatnot. Just understand what the business does; understand how it makes money. Then think about that in the context of the future and the opportunities that might afford that business down the road.

Chris Hill: The second part of Will's questions, when it comes to investing, what are your sell signals? Do macroeconomic factors ever play a role in them? I'll just answer that second one really quickly. I don't think they ever have. I'm just trying to think about my own. I try not to sell stocks. It does happen. But the times that I've sold a stock, I don't think macroeconomic factors have ever played a role in that.

Jason Moser: Yeah, I don't think macro really comes into my sell decisions very often. I absolutely have sold more often based on the reason that I don't really fully understand this business maybe as well as I thought I did. Maybe understood the core concept of business, but seeing the future and the drivers of the business, it wasn't as clear in hindsight. When it comes to macro, I tried to sell as little as possible. That's my underlying philosophy. I really don't want to sell unless I have to. Then, ultimately, I have to sell for really a couple of reasons. Either, No. 1, I need the money. I need the money to do something else, whether it's pay for college or we have a home improvement project that I'm to undertake.

Or if I just come to realize that the thesis is either broken or my thesis was misguided from the start. Sometimes, we just get it wrong, and I think it's really important for investors to remember that you need to embrace the mistakes. You need to embrace getting things wrong because that's what makes you better. That's what you learn from. I think once you hit that point as an investor, where you actually enjoy the mistakes from the perspective that it made you smarter, that can be very powerful as an investor.

So I don't let the macro really guide sell decisions very often. I will let it guide my buy decisions sometimes. We've seen over the past year, year and a half, it's obviously been a very volatile market. It seems to be very driven by headlines in whatever Jay Powell is going to say at any given meeting, at any given time. We clearly have zero control over any of that.

We ultimately don't really have much control over any of this stuff at all. But when I run into a stretch of time like we've witnessed over the past year, year and a half, and I've done this with my services as well, I like to take a step back and make sure that I understand where the portfolio stands. How diversified are we? Where could we enjoy a little bit of additional exposure?

Oftentimes, in positions like this that we're in now, with rates going up and we're seeing growth obviously in question, it's been a good time to invest in some of those more stable businesses. Businesses with steady and reliable profitability and cash flows and sort of paths forward. Even if those businesses aren't screaming values today, I tell you what -- they're a heck of a lot better value today than they were three years ago when everything was going up. I do think it helps guide my sell decisions less, but my buy decisions more.

Chris Hill: Jason Moser, always great talking to you. Thanks for being here.

Jason Moser: Thank you.

Chris Hill: In the spring of 2020, at the start of the pandemic, we had what turned out to be the shortest bear market in history. But at the time, many companies didn't know if they were going to make it through. Deidre Woollard caught up with Liz Hoffman, author of the new book, Crash Landing: The Inside Story of How The World's Biggest Companies Survived an Economy on The Brink.

Deidre Woollard: One of the things I liked about the book was how you set up those moments of people in their daily lives and the way things shifted. I want to talk a little bit about Airbnb because that was one of your through lines, through the book. We got earnings from them recently, and they were incredibly strong. What leadership tips can we learn from Brian Chesky's early actions to cut costs and where Airbnb is now?

Liz Hoffman: You have to remember, coming into 2020, this was going to be their IPO (initial public offering) year, the most consequential thing, they're going to take their place in the pantheon of Silicon Valley unicorns who've gone public. And Brian Chesky, if you could open his part of the book, he'd spent the holidays in 2019 with a stack of S1s, thinking about what he wanted the story to be as they prepared to debut.

He'd written a note to himself that 2020 would be the year of connection, and that's something that just stuck with me as I was following that story. Then they started to see very early on what we all instinctively came to understand in that nobody wanted to go anywhere. Just the fear, the idea that you would go to a stranger's house sounded insane very quickly by March of 2020.

They have revenues that are falling off a cliff. They have refund requests. They're looking at a negative cash flow. They actually have a little more cash than most start-ups -- had a couple of billion dollars in the balance sheet -- but knew it wouldn't be enough. They raised $2 billion from a bunch of investment funds in a deal that I remember at the time thinking, man, are they crazy? I couldn't fathom that this company seemed so clearly left for dead to me.

I have a story in the book, one of those investors, Alan Waxman at Sixth Street, had gotten a call from Silicon Valley. Basically, are you insane? What are you doing here? He said to Jeff Wiener -- listen, the way we structured the deal, it only has to be worth about $2 billion.

I remember at the time it had been worth more than $30 billion. He said if this company isn't worth $2 billion, we all have bigger problems, which is to say the economy will have collapsed. And then fast forward to spring and summer of 2020, when Airbnb started to notice that people actually were traveling, but they didn't want to go to a hotel in New York City or Las Vegas for a weekend. They wanted to go to the Catskills for a month.

They very quickly pivoted to these long-term stays. They rode that wave of remote work, continuing to ride that wave. And then decided in the summer of 2020 to actually go public after all, with more than a $100 billion valuation. Just a fabulous, interesting pandemic story just bookended by the utter despair on the front end and then this weird frothy market euphoria on the back end.

Deidre Woollard: Bold moves are a theme I've noticed in the book too, people making moves when everyone else is going in the opposite direction, which brings me to Bill Ackman. You talk about his story in the book, and that's fascinating. He ends up buying these credit default swaps on corporate bonds before anybody knew how serious things were getting -- huge risk. What made him so confident on that?

Liz Hoffman: I think that Bill Ackman's fascinating here because he called the pandemic coming and going. Your audience knows Bill well, but he's an activist investor. He holds these incredibly concentrated stock positions. He researches these single-name companies and then makes a big bet. That's not what he did here. He had these two macro trades on, the first of which, you're right, he notices in February of 2020. Bill is also a little bit of a hypochondriac. You can tell throughout the book that he's very nervous about this very early. I actually open the book with him freaking out at this student group in London in February of 2020.

But he notices very early on something that, in retrospect, was incredibly obvious, which is that the market was massively mispricing risk of all kinds. You'll remember that decade coming into 2020, interest rates are zero, money is free, and it pushes everyone further and further up the risk curve. What he really noticed was that, basically, investors were not assigning any more risk to corporate bonds than to treasury bonds, the most creditworthy counterparty on the planet. These spreads have gotten incredibly tight. He said, listen, I don't know how bad this is going to get, but there's risk that is being ignored here. He bought the equivalent of an insurance policy.

Within a couple of weeks, the risk that he was insuring against had really gripped the entire market. He was sitting on a piece of paper for which he had paid $27 million in up-front costs that was worth $2 billion. On the back end, he also was quite quick to realize something that now seems insane that we all, and I include the Federal Reserve in that mess, which was a massive inflation that we've seen as demand rebounded, supply chains had been cut, you had this huge fiscal stimulus, people were sitting on mountains of savings, and they wanted to spend it. He put on an interest rate position -- it was a little early in early 2021 -- that ended up being incredibly lucrative. So, called it coming and going in a way that I don't think anybody else did, including the Central Bank.

Deidre Woollard: One of the things you're talking about in the book is individual companies having to think about the way they use capital and make those decisions all of a sudden. You had companies cutting dividends, stopping buybacks, trying to issue corporate bonds, getting money wherever they could. Now we're on the other end of that; most companies have reinstated their dividend buybacks last year. What do you think companies learned or maybe missed about how to use cash going through the pandemic?

Liz Hoffman: I think we learn this lesson every five, 10, 15 years, which is that you can never be too liquid. In good times, there's not a lot of value to having a ton of liquidity. You don't earn anything on it, especially in the 2010s when interest rates were zero, you literally were not earning anything on cash that you kept. You would see these activist investors come in and really push companies to pay dividends, to do buybacks, to do something with their cash and not keep it there. Early on, people thought they had more liquidity than they did. There are two good examples of that in the book. One is Hilton, which basically became the first blue chip company to pull its credit lines with banks.

They did it in early March. CEO Chris Nassetta had called this general counsel and said, do I need board permission for this? The general counsel said, no, you don't. His CFO called the banks and said, I want the money now. And had some very tough conversations because these loans are designed to be problematic. Banks give them out basically for free, trying to get other business. Then, when everyone wants them all at the same time, it becomes incredibly stretched.

It was so newsworthy at the time that Bloomberg had written a story when they did it. Someone forwarded the story to the CEO of Hilton, and he said, this isn't going to be really worth writing about in a week; everyone's going to be doing this. He's right. Then on the other side of that equation, the banks, I dug into Goldman Sachs's balance sheet. It's a trillion-dollar balance sheet, a couple hundred billion dollars of things that ought to be liquid, things like treasury bonds.

But you have to remember how topsy-turvy that market was. Usually, in times of crisis, people flock to things like treasuries. They sell stuff like stocks and real estate, and they move into liquid-safe things. But the market was so seized by panic that you sold the things you could sell. Actually, the selling started on the safer end of people's portfolios.

There were times when you couldn't get a bid on treasuries. It became incredibly hard inside these financial institutions to say, well wait, do we have enough money? They ended up spending a weekend effectively looking through the couch cushions, if you can think of it that way, trying to move trades around and free up any liquidity in the right currencies and make sure that they had enough to get through. But it was incredibly fraught there for a while. I think that was something that I didn't really appreciate until I sat down with the totality of my reporting to realize just how close it came to really falling apart.

Deidre Woollard: One of the other things that we saw during the pandemic was that companies in the same vertical, that were competitors, had to look to each other for guidance. You saw it in airlines; you talk about it also in the automotive industry. Now we're back to business as usual, but what do you think those companies learned from working with what are usually their closest competitors?

Liz Hoffman: I was fascinated by that tension. I'm not really sure I came out on one side of it or another, but you'd see these small situations where the competitive overpowered things like -- I'll give you one that I was really struck by, which was March 17, that weekend, 15th, 16th of 2020. The automotive CEOs all hopped on a call, those organized by the UAW, the union, about whether they should close their factories. There were just obvious health hazards. The call itself almost didn't happen because they were so concerned about either sharing competitive secrets or running afoul of anti-collusion rules, which is to say these three CEOs are not really allowed to talk about production, and they certainly don't want to.

Simply organizing that call, I've seen with the head of the union, who is just beside himself. His employees are getting sick; I think the first had died by then or very soon thereafter. He can't get the CEOs on the phone because they don't want to talk to competitors. That was a really interesting one.

With the airlines, I think you started to see that evolve. Early on, everyone very clearly in the same boat. I spent a lot of time on this, two or three days in the war room, where all the CEOs go to Washington and are trying to hammer out this aid and sharing information with each other that they never would about flight schedules and things like that. By the time the second CARES Act negotiations were happening that summer, that trust had really started to fray.

You would start to see the stronger airlines, notably JetBlue and Delta, which frankly didn't really need government help at that point and weren't super interested in helping their competitors -- like American, in particular, which did need it -- get that help. You started to see some mistrust get sown there.

Ultimately, the politicians took care of that decision for them and just extended the aid. But yeah, you start to see those competitive hackles come and go. I think, more or less, we're back to where we started. It's an incredibly tight labor market. Every nickel and dime counts in the inflationary environment that we're in. I think those competitive hackles are right back up.

Chris 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 them, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.