May 10, 2022

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TOGETHER WITH

Good day. Today's trivia: When was the Nasdaq Composite Index created? a. 1939, b. 1971, c. 2000. Follow the wave 🌊 below for the answer.

🔎 Zooming in on the finance and investing topics for today:

What’s happening to the Nasdaq?
What would Berkshire Hathaway do?
Inflation and the "Rule of 72"

INVESTING

What's Happening To The Nasdaq

Will Ferrell and John Reilly in Step Brothers (2018)—Giphy

The top three most popular US market indexes—S&P 500, Dow Jones Industrial Average, and the Nasdaq Composite—have collected average losses of about 13% so far in 2022.

On the other hand, the Nasdaq 100, a stock market index of the 100 largest non-financial companies listed on the Nasdaq, is down 26%. Although we can see that the entire market is fighting bears, it’s clear from the tech-heavy Nasdaq 100 index that the tech sector is having the worst go at it.

Why is that?

Volatility: 7 of the top 8 holdings in the Nasdaq 100 (AAPL, MSFT, AMZN, TSLA, GOOG, FB, GOOGL, and NVDA) have an average beta of 1.34. A beta of 1 means that a stock mirrors the volatility of whatever index is used to represent the overall market (i.e., S&P 500). A beta greater than 1 means that it's more volatile than the overall market, and a beta less than 1 means it's less volatile.
Weight: The S&P 500 also holds these same 8 stocks heavily, but their weight is more than doubled in the Nasdaq 100 (49% vs. 24%).
Earnings: Aside from the index characteristics themselves, we’ve also seen cases where one underperformance can send the whole market into an emotional meltdown, especially with tech stocks. Recall Netflix's latest earnings report where they conceded they lost 200K subscribers?
Sensitivity and broad conditions: There are a lot of balls in the air right now, and all of this has culminated into one thing—increased market sensitivity and fear. Concerns about inflation, war, recession, interest rates, housing prices, disease, you name it, we’re worried about it. Tech stocks, which are abundant in both the Nasdaq and the S&P, feel this drama the hardest due to their vulnerabilities.

What should you do about it, if anything?

Not every “problem” has a straightforward solution, or even actionable steps we can take towards solving it, and although this might make us feel a little helpless and scared, it helps to remember that patience and time are often our greatest strengths.

But... we get that may not be the most useful feedback to hear in times of emotional distress, so here are a few ideas:

Opportunistic for alternatives: Right now, classical investments aren’t doing so well. Countless stocks ranging from established companies to those in growth stages are down more than 50%, and even newer options like crypto are downtrodden. Now might be the time to diversify, wise up, and look into alternative investment opportunities. The options here are limitless, and they range from things as cliché as real estate to as niche as trading cards.
Become a bear: You can still make money in a bear market, but you won’t usually do it by owning simple shares and riding them down. You could buy put options, sell calls, or simply buy defensive stocks and good companies at low prices.
Wait it out and stay invested: We can never recommend opportunistically trading in and out of the market, but it’s up to each individual investor at the end of the day. If you can afford to take the risk associated with trying to time the bottom or buy the dip, it might just pay off, but don't count on that strategy consistently working over the long haul. If not, keep dollar-cost-averaging. As we keep saying over here, time in the market beats timing the market.

💡 Here's a related lesson on this topic:

What are Alternative Investments?

Investing Basics

7 mins

MARKETS

What Would Berkshire Hathaway Do?

Warren Buffett is 91 years old, and his right hand man, Charlie Munger, is 98. They’re a somewhat controversial duo, and you either think they’re out of touch or geniuses. Nevertheless, if anyone has been investing long enough to garner attention when they make some moves, it’s these guys.

And lucky for us, Berkshire Hathaway recently had their annual meeting, where Buffett and Munger highlighted some of their most noteworthy moves and tips. 👇

Boomer money

Reversing course: It’s been widely reported that Berkshire has been selling off a lot of holdings and adding to its massive pile of cash on their balance sheet over the last couple of years, so much so that they had over $140 billion in straight greenbacks by the end of last year. Now though, they’ve begun buying again, but why?
Going shopping: Berkshire took a firm step towards acquiring 4 companies’ shares. Alleghany, an insurance company, was purchased for $12B, they then purchased $4.2B of computer manufacturer HP’s stock, added $20B to their Chevron holdings, and became the proud owner of 9.5% of Activision Blizzard too.
Your total is: In summary, Berkshire spent over $50B on new positions and additions in the first quarter of 2022 alone, a notorious bear market, and reduced their cash reserves to their lowest point since 2018 in the process.

Applying these ideas

Can’t pass up a deal: We all know that quote about being greedy when others are fearful, and fearful when others are greedy. Well, that’s kind of exactly what Berkshire has been doing, holding out during times of hype and meme stocks, and buying back in now that everyone’s portfolio is red. Perhaps we could take a hint from one of the longest tenured giants in the investing world and do the same.
Counterintuitively, invest in oil: On the surface, you wouldn’t think the fossil fuel industry would be the investment of the future. Regardless of where we’re headed though, the world is still heavily reliant on these energy giants as it stands today. Buffett and Berkshire see this, in addition to the record profits these firms are raking in right now during this energy boom.
Investing in yourself: During the meeting Buffett and Munger also addressed the number one topic at hand, inflation. Buffett's key perspective on the situation was that this situation, and all the ones like it, are all out of our control, and the one thing we can always invest in is ourselves. During times of uncertainty, it’s more important than ever to be as valuable as ever, and as Buffett said, the best thing we can do is “be exceptionally good at something.”

MONEY TIPS

The Rule of 72 and Inflation

Inflation is getting so old that we might need to come up with a new term for it. It’s something that’s been ever-present in our lives for more than a year now, and if the end is in sight at all, it sure is foggy.

It’s gotten to a point where most of us are adjusting our lives in response to these historic numbers, and luckily, there’s a rule of thumb for sizing up the situation out there already. It’s called the rule of 72, and it’s usually reserved for calculating how long it’ll take to double an investment, but now we’re applying it to our cash.

It works like this: You divide 72 by the percent value of an investment’s annual APY. So, an investment with a 2% yield would theoretically take 36 years to double, and a 12% yield would take just 6 years.

Applying that to inflation: It works much the same, just in reverse. If we’re averaging 9% inflation per year, by applying that same process, we’d show that our currency would probably lose approximately half its value in about 8 years.

Why does it work? Without trying to explain the math details, it’s derived from a logarithmic formula, even though it was actually likely noticed years before we used complex math to prove it. The actual number is 69.3, and some people prefer to round up and use the rule of 70 instead. Overall, it’s just an approximation, but it’s useful.

💡 Need a refresh on inflation? Take this lesson on it:

What is Inflation?

Investing Basics

6 mins

🔥 CORPORATE CORNER

TODAY'S MOVERS & SHAKERS

Upstart (UPST) -61% as the AI lender slashed their full year revenue forecast from $1.4 billion to $1.25 billion citing rising interest rates and a possible recession
Peloton (PTON) -15.75% after reporting a much wider than expected quarterly loss, a steep decline in sales, inventory pile up and weak future guidance
Vroom (VRM) +16.5% as quarterly revenues exceeded analyst's expectation, the announcement that current COO Thomas Shortt will become CEO
Bitcoin (BTC) +3.5% to $31,139.80
Ethereum (ETH) -1.5% to $2,348.78

This commentary is as of 8:35 am PDT.

🌊 BY THE WAY

Answer: The Nasdaq Composite Index was created in 1971, while the Nasdaq 100 Index was created later in 1985 (CFI)
🐻 ICYMI: Ways to stay calm amidst the market madness (Finny Bites)
🔗 How correlated is crypto to stocks? (Factor.fyi)
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Finny lesson of the day:

Bear Markets & Volatility

Investing Basics

5 mins

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