Is Now the Best Time to Get Into the Stock Market?

Dave:
Hey, everyone. Welcome to On the Market. I’m Dave Meyer, your host, and I am here by myself today, but we do have a guest today, an excellent guest. We’re going to be bringing on Chris Hill who is the host of Motley Fool Money. I don’t know if you’ve listened to that podcast. I do. It’s a great one, and he is the director of The Motley Fool’s Audio Programming. He is, honestly, an investing and finance podcasting legend. He’s been doing it since 2009. As someone who’s been doing this for nine months, I find that very impressive, and I’m grateful for him for paving the way for more shows just like ours.
So we are going to be talking about mostly the stock market today, and I know this isn’t our typical show, but I truly believe that as an investor, it is important that you understand what’s going on in every asset class, every major asset class, right? I don’t really follow the fine wine trading market, but I do pay attention to what’s going on with bond market, the stock market, the crypto market, commodities because it does impact real estate investments. I know it’s not always that clear, but all of these things are interconnected.
Personally, I’ve said it before on the show, I do invest in the stock market. I don’t really pick individual stocks very frequently, but I keep about 25% or 30% of my net worth in the stock market because I just think it’s smart to diversify. I know the other panelists don’t. We did a show about it one time, and I asked them if they invest in stock. Everyone was like, “No,” and I was surprised about that. So it’s not for everyone, but I do personally. I think if you’re interested in diversifying into other asset classes, this is going to be a really helpful show for you. Chris is extremely knowledgeable about the stock market, and I think you’re going to learn a lot. So we’re going to take a quick break, and after that, we’ll be back with Chris Hill.
Chris Hill from The Motley Fool. Welcome to On the Market. Thank you so much for being here.

Chris:
It is great to be here, Dave. Thanks for asking me.

Dave:
Well, of course. Chris, I feel like you’ve been following me around a little bit because I do listen to your podcast. It’s great, but I also, just two weeks ago, went on a trip, and I downloaded Morgan Housel’s The Psychology of Money and listened to it as an audiobook. There you were reading the book to me, and I was not expecting that. I did not know you narrated that book. It’s fantastic.

Chris:
Thank you. 98% of the credit goes to Morgan for writing, truly, one of the great financial investing books of this century so far.

Dave:
Absolutely. Yeah, and you did a great job. Yeah, the book is fantastic. If you’ve never read it and you want just a… You could probably describe it better, but it’s just a really good introduction to some of the most important principles to personal finance, investing finance, and it’s just written, and you do a great job narrating it, Chris, in such a digestible, story-driven way that makes it really relatable and fun to listen to.

Chris:
Yeah. I think Morgan is a great writer. He has a blog online. He’s a partner at the Collaborative Fund, and he usually writes an essay a week. So folks can find that online just to get a sense of his writing. The thing I tell people, and I’ve given a physical copy of the book as a gift to several different friends and family members, and the thing I’ve said to absolutely every one of them is, “Just read the first 20 pages. You don’t have to read the whole book,” because sometimes you give someone a book, and it’s a non-fiction book. That can seem like homework.

Dave:
Yeah.

Chris:
But Morgan I think is such a great writer that he just draws people in. They read those first 20 pages, and they’re like, “Okay. I want to read more.”

Dave:
Absolutely. Yeah. I mean, people like you and me probably find non-fiction finance books page-turners, but I would describe it as a page-turner. I don’t know if anyone else sees it that way.

Chris:
Well, yeah, and as you said, he’s basically telling stories, and the overarching thesis of the book is investing success is largely about behavior, and behavior is hard to teach. One of the things I think most people automatically assume about investing is it’s about math, and it’s like, “Well, yes, there is math involved, but it really is so much about your temperament, your mindset, your behavior,” and the behavior that it takes to get wealthy is different from the behavior it takes to remain wealthy. That’s really the opening story of the book is about someone he encounters who has made a lot of money and then quickly loses a lot of money.

Dave:
Yeah. It’s a great book, so definitely check that out. We have you here though to talk about the stock market, and as you know, Chris, our audience is primarily made up of real estate investors and aspiring real estate investors or people who just work in the real estate industry, but the majority of people who invest in real estate also have some percentage of their net worth invested in the stock market, and so we want to pick your brain, since you’re so knowledgeable about this, about the stock market. I was hoping you could start by just telling us a little bit about where we stand today. 2022 was a tumultuous year. How would you sum up what’s happened over the last 12 months?

Chris:
It’s really been a rough year, and I know that for people who are new to the stock market or thinking about the stock market, the way 2022 went doesn’t necessarily make investing in the stock market seem more appealing. Yet, weirdly, it actually is more attractive now, now that the market has taken this hit that it has, and it’s really been a sustained hit. We saw a very quick dip early in the pandemic in March and April of 2020, and we bounced back from that very quickly, and that’s not the norm. The long history of the stock market broadly tells you that two out of three years, the market goes up, which generally means one year out of three, the market goes down.
I am optimistic about 2023, and to be perfectly frank, I’m not usually optimistic at the start of the year. I think part of that is because largely, for the past 10 years, it’s been a great run for investors. If you’ve been invested in the stock market for the past 10 years, yes, you’re down a bit more now than you were 12 months ago, but you’re up substantially more than you were 10 years ago. So, usually, at the start of a new year, I’m like, “Oh, boy, we’ve had a great run. I don’t know.” I was thinking about this when I was walking to my office this morning that, wow, I actually feel optimistic about 2023. It’s a great feeling.

Dave:
Well, yeah, because it’s like… Like you said, there was that short dip in 2020, but outside of that in, basically… What is it, a 12, 14-year bull run in the stock market for majority? Something like that?

Chris:
Yeah, really since, I would say, mid 2009. You could even just say 2010. From 2010 on, really, since the Great Recession, yes, there have been dips here and there. There have been some bumpy rides, flash crash here, different mini panics. I was talking with one of our analysts the other day about… I think it was 2012 or 2013, and I said, “Do you remember, there was a six-week period where all anyone connected to the stock market did was talk about Greece?”

Dave:
Oh, yeah.

Chris:
We talked about Greece like it was good. Greece had all this debt, and there was this panic that Greece was going to set off this horrible ripple effect, it was going to take down the European Union, and then it was going to take down the US market. Now, we look back on that and think, “What were we doing?” Never underestimate investors’ ability to over-panic about things that are really just short-term speed bumps.

Dave:
Yeah. So it makes sense given that context and that a normal economic cycle is usually something like seven or eight years. Now, we’re talking about something like 11 or 12 years. Yeah, it makes sense that at the beginning of the year, you’re like, “Uh, is this the year? Is the shoe going to drop?” Now, are you feeling better because the shoe has dropped?

Chris:
It’s a couple of things, Dave. I’m feeling a little bit better because the shoe has dropped. Anytime a company goes public, you can turn on CNBC or Bloomberg, and you can usually see that company is ringing the opening bell at the New York Stock Exchange, and there’s a celebration. There’s so much excitement and rightfully so. But when you step back and think about it, a company going public, that’s really just a capital event. That is simply a company is raising money, and so one of the things I’ve learned to do as an investor over the years, and it took me some time, but I’ve learned over the years to ask, “Why is this company going public? What do they need that money for?”
Sometimes there are very good and valid reasons, bullish reasons. A company is looking to invest and grow. That sort of thing, but what we saw over the last two and a half years because of the enthusiasm, particularly during the height of the pandemic in 2020, we saw a lot of companies going public that really didn’t have any business going public. So one of the reasons I’m optimistic as an investor about 2023 and beyond is because some of the truly great businesses are trading at lower valuations. There are huge sustainably profitable businesses that, really, just have had their share price knocked down a bit. It hasn’t truly affected the business itself. They’re just selling at a bit of a discount.
It’s one of Warren Buffett’s great lines where as soon as the tide goes out, you can see who’s swimming naked, and that’s pointing towards companies that really had no business being public, stocks that got overheated. Peloton is maybe the classic example of a pandemic stock that there was all this excitement. “Oh my gosh, everyone is going to buy a Peloton device. Everyone’s going to be working out at home. Gyms are doomed.” That sort of thing, and that clearly has not played out for Peloton. It’s probably an open question at this point. How much longer Peloton is a standalone public company? So that’s part of why I’m bullish on the stock market is because I think that we’re in a moment now where quality truly matters and focusing on businesses with long-term plans and a track record of executing, that’s going to reward investors.

Dave:
Wow, it sounds so simple when you say it. Just focus on quality and good businesses with good business plans. Imagine that. Right?

Chris:
Right, but it… Let’s go back to Morgan Housel and The Psychology of Money. We’re all human beings, and we all get caught up to varying degrees. We all have FOMO, and so we will find ourselves in a position of saying, “Well, wait a minute. Maybe I should take a flyer on that. Maybe I should put a little bit of money into that growth stuff. What if they’re right? If I invest in 10 growth stocks, they’re all unprofitable. If just one of them hits, it can be the next Amazon. It can be the next Apple, Microsoft, that sort of thing.”
That’s what I think, for me anyway, makes the stock market so interesting is that it’s human beings who are running these businesses. Human beings make mistakes. We make mistakes in investing, and it’s something I always try to remind myself whenever I buy or sell a stock, which I don’t do very often. I don’t transact all that often, but I try to remind myself that there is someone else on the other side of this trade. If I’m buying shares of a company, and I’m thinking, “Oh, I’m bullish on this company,” there is someone on the other side of this trade who is essentially saying, “I am happy to sell you my shares of this stock because I am not as bullish on this company as you are.”

Dave:
I do want to ask you about something, Chris. It seems to me, and you know better, that a lot of the correction in the stock market has been for all sorts of things, but one of the impacts has been rising interest rates. For people who listen to this show, I think it’s obvious why a sector like the housing market, which is highly leveraged, is interest-rate-sensitive. Could you help us understand why the stock market, if you believe it is, is interest-rate-sensitive?

Chris:
Absolutely. I think that part of this great bull run that you and I have been talking about has been fueled by an environment with the Federal Reserve that has been very friendly in terms of printing money, in terms of interest rates. So those unprofitable growth companies, part of the run that they had prior to 2022 was fueled in part because money was so cheap. When money gets more expensive, that really tends to punish unprofitable startups that are really looking to borrow money to fuel their growth. In the long term, it tends to reward the businesses that have what we like to refer to as fortress balance sheets.
I remember when we started podcasting in 2009, and we’re still in the Great Recession at that point. One of the things we talked about at the time was… Particularly in the energy industry, we talked about how we were probably going to be seeing some acquisitions take place where large… ExxonMobil, Chevron, the behemoths of the industry having the opportunity to buy smaller companies because those smaller companies were in trouble. They were having trouble with their own balance sheet. So I think when stock investors look at what happened in 2022, there’s no way to tell the story of the stock market in 2022 without talking about interest rates and inflation, and what that did to so many of those companies. I mean, there are companies that I am confident will make it through the next five years, but they absolutely got punished because of interest rates going higher, and their share prices basically came back to where they were before the pandemic.

Dave:
Wow, it’s incredible and speaks to why you’re optimistic if you’re seeing that some of these companies that you feel confident are still operating effectively, but have share prices a fraction of what they were. But you’re optimistic despite the fact that the path on interest rates, at least verbally, the Fed has said that they intend to continue raising rates, but you still are optimistic nonetheless?

Chris:
I am, but I think the important context there is my timeframe as an investor is measured in decades, not in quarters. Individuals don’t have many advantages in the stock market. We don’t have advantages over algorithms. We don’t have advantages over institutional investors, or hedge funds, or that sort of thing. So, on any given day, or week, or month, or even quarter, we as individual investors in the stock market are at the whim of those larger entities.
The one true advantage that we have is time. So if you’re a stock investor, particularly if you’re younger and you’re thinking about investing money over the next 30 or 40 years, you have a huge advantage over an institutional investor, or a hedge fund manager, or a trader on Wall Street whose performance is measured in 90-day increments. It’s like, “What did you do this quarter?” That’s how we are going to judge you. That is going to determine whether you have a job a year from now. So, as individuals, one of the few advantages we have is, really, our ability to say, “Okay. If I’m thinking 20 years out, if I’m thinking even 10 years out, then yes, I’m going to pay attention to what the Fed does with interest rates in 2023.” But over a 10-year period, a 20, 30-year period, what happens in the short run is going to get smoothed out over time because, again, these are capitalist businesses.
A company like Microsoft is going to pay attention to the cost of money. They’re going to pay attention to interest rates, but it is not going to materially affect their plans for what they want to do in terms of acquiring more customers, retaining those customers, innovating their software. Same for Apple, same for Amazon, Alphabet, any of the transformational companies of the last 25 years. So that’s an important thing to keep in mind. It’s like, “Well, what are these companies going to do?” It’s like, “Well, if the Fed does this, what do we think companies are going to do?” That’s a great question to ask. It’s an important question, but the larger the company, the more fortress like their balance sheet, the less they have to worry so much about the cost of borrowing money.

Dave:
Yeah, that makes so much sense. So just trying to summarize your position here on 2023, is that like the fact, what matters… Yes, the Fed’s behavior is going to impact short stocks in the short-term probably for companies that are inherently more volatile or risky in the first place. But for big companies and maybe just for every company, the fact that really matters is the discount on prices if you’re a long-term investor. Is that a decent summary?

Chris:
Yes, I think it is, and I would just add to that one thing that we’ve seen over the past 12 months is different companies dealing with inflation, dealing with higher interest rates, and in some cases, companies absorbing those costs. It really is a fine line that companies try to manage when it comes to what they’re charging people. Warren Buffett has said that the quality he loves to see more than any other when he is looking to buy shares of a business is pricing power. “Is this a business that has the ability to methodically raise prices over time in such a way that it does not alienate their customers?”
One example that we saw in 2022 was Chipotle. I mean, Chipotle did a phenomenal job of absorbing some costs as their input costs of proteins, and rice, and avocados went up, but they passed some of those costs onto their customers, and customers were willing to pay it. It’s one of the things that has made Starbucks such an incredible investment over the past 20 years is Starbucks has just methodically raised the price of a cup of coffee. They’ve innovated with cold beverages, which I do not drink. I never drink those beverages, but as a Starbucks shareholder, I love that they sell them, and I love that people like my daughters buy them.

Dave:
Yeah, that is honestly an incredible asset to these companies, especially in times of inflation like we’ve seen right now. It becomes even more important when your input costs are so variable. We’ve seen these crazy variable material costs. This is true in real estate as well. Fortunately, for those companies, some of them are able to just pass those prices along and keep operating like they have been. I mean, I can’t blame Chipotle. I would pay anything for Chipotle, to be honest.

Chris:
Again, it’s been fascinating to watch, and I think what will be equally fascinating to watch is as inflation comes down, and we’ve seen this trend line over the last six months… I mean, as you and I are talking, the price of a gallon of gas, the average price of a gallon gas in the United States is actually lower than it was 12 months prior.

Dave:
I saw that. Yeah.

Chris:
It went up over the last 12 months, but it’s come back down and dropped below where it was 12 months ago. What’s going to be interesting to see is businesses like Chipotle… Pepsi as well. That’s another business that I think has done a very effective job of raising prices. Campbell Soup. We were talking about this on our podcast the other day. You don’t necessarily think of Campbell Soup as a company with pricing power, but they actually do and have executed a sales strategy that involves raising prices. I think it’s going to be fascinating to see Pepsi, Campbell Soup, Chipotle, and others. Do they start lowering prices at some point? If they do, how much do they lower them to really entice new customers and build that customer loyalty?

Dave:
Yeah. That’s very, very interesting. So, Chris, I’d love to switch gears a little bit and talk a little bit about our audience. As real estate investors who are primarily real estate investors, how would you recommend or what advice would you give to them about investing in the stock market in 2023? Some people who are real estate investors put money into the market between purchases in real estate or people like me who invest primarily in real estate still put 25% or 30% of my net worth into the stock market. So how should people with that context think about investing in the coming year?

Chris:
I think if you’re interested in investing in the stock market, I would say two things right at the top. First, you shouldn’t be investing any money that you need in the next five years. If you think you need it for anything, for a real estate purchase or investment, paying for a new car or for someone to go to college, that sort of thing, it should not be in the stock market. It should be in a very safe investment vehicle. Bonds are pretty attractive right now in terms of their percentage that they’re paying. More attractive than they’ve been in a long time, so I would recommend that. But if it’s money you need in the next five years, it shouldn’t be in the market.
If you’re thinking 5 to 10 years out and beyond, then the second thing I’d say is start with just something basic like an S&P 500 index fund or ETF. At The Motley Fool, we are big fans of Vanguard because Vanguard tends to have the lowest annual fee, and I think that is probably the best first step for anyone who is new to the stock market because it gives you broad exposure. You’re getting little pieces of the 500 largest companies in the United States, and it’s really just a great first step.
The other thing I’ll add, Dave, is that I think a lot of people when they’re starting out think that they need to jump in, in a big way, and we’re big fans of diversification, but if you’ve got a chunk of money in an S&P 500 index fund or a total market index fund, you’ve got instant diversification. So if you want to take the next step and start looking at individual companies and becoming a share owner of some of those companies, you can start slowly, and you probably should.
One of our analysts who’s a regular on our podcast talks about how he’s a big fan of what he calls buying in thirds, just dipping his toe in the water of a new company. When he’s looking to buy shares of a new company, he doesn’t go all in right away. He says, “Well, I’m going to put a little bit of money in this. Maybe I’ll dollar-cost average my way in.” Sometimes you’re buying shares at a higher price down the line, but that’s okay. If it’s a great business and you are investing for a long time, it’s going to reward you in the long run.

Dave:
That’s great advice. I have heard you talk about it on the show, and I really like that. That’s just not something you can do in real estate either. It’s very difficult in our industry to dip your toe in. So that could be a really good thing for people looking to diversify, a good option for them to test the waters in the stock market slowly. I follow all the personal finance news. Everyone says, “Just buy index funds,” which is true, and I think it’s a good thing to do, but it is fun to pick stocks. I do it just as a hobby. I don’t put a huge amount of money in it, but for people who do, it just seems so hard. How do you get started in even identifying a company that you want to invest in, and how do you distill the information you need to determine if it’s a great company like you said?

Chris:
Peter Lynch, one of the great investors of the last 50 years, wrote one of the classic books. He was Fidelity’s fund manager, ran their biggest mutual fund, the Magellan Fund, and then wrote a great book about it called One Up on Wall Street. One of the things he wrote about and popularized was this idea of, “Look around you. Look at the products and services you’re already buying and using every day, and use that as a starting point.” Now, some people make the mistake of using that as their end-point as well and just saying, “Well, I shop at Safeway, so I’m going to buy shares of that grocery store.” Again, for Peter Lynch, it was like, “No, that’s a starting point,” and it is. It is a great starting point, particularly if you’re already spending money there. I mean, you talked about Chipotle. I love Chipotle. I’m a shareholder. Same for Starbucks. I grew up in New England. If Dunkin’ Donuts was still a public company, I would probably be a shareholder of that as well.

Dave:
Oh, man, but their stock price has probably doubled just by my consumption when I lived on the East Coast.

Chris:
Same for me, but I think that’s a great place to start. It’s like, “Well, what am I already buying? What am I already spending my money on?” But from there, I think there are two questions I recommend anyone ask when they’re thinking about a business. The first question is, “How does this company make money? What is their business?” The second question is, “How do they plan to make more money in the future?” So if it’s a restaurant business like Chipotle, and Starbucks is technically in the restaurant category as well, it’s looking at, “Well, how are they growing their number of locations? Are they building loyalty? Do they have rewards programs?” All that sort of thing and finding businesses that, again, can reward people for the purchases that they’re making.
I mean, if you think about it, when you go to Chipotle just to get lunch, you’re making an investment. You’re investing 10 bucks in a burrito, and they want to reward you for your investment so that you come back again next week or possibly even tomorrow and buy another burrito. It’s the same thing with stock investing. You want to look for businesses that have a plan to acquire and retain customers. For some businesses, they’re right in front of you. They’re consumer-facing businesses. For others, it’s a little more difficult. I mean, Microsoft is a company everyone is familiar with, but that’s a business that you also have to dig into, and so much of what they do is business-to-business, selling software packages to different companies, that sort of thing.
So, for people who are interested in digging in, you can dig in and find the information on those businesses that aren’t right in front of you or in your pantry. Anytime we talk about a business like Johnson & Johnson or Procter & Gamble, I often make the comment on the show that absolutely everyone listening to this podcast right now has something in their home made by this company. You’ve undoubtedly got some Procter & Gamble cleaning product or household product wherever you are, wherever you live.

Dave:
I love that example. You made me think of something. I’ve bought a lot of stocks on a whim and regret it, but one time I did it well was… In my role at BiggerPockets, I work as the VP of data and analytics. I do internal stuff as well, and we rely on this one software, and one year… It was an up-and-coming company. They had gone public, and they came to us, and they literally… I think it was 6 or 8X star pricing in one year, and I paid it because we had to. It was so valuable. Then, I was like, “I have to buy this stock because if I’m willing to just…” like you talked about pricing power. If I’m just willing to 6 or 8X our spend on this company, it’s so great. It’s such a great product. I’m sure everyone else is doing that.
That one actually worked out well for me, but I think it’s just a good example of paying attention to the things that are going on around you and the dynamics with the businesses that you’re interacting with regularly. Chris, one question I wanted to ask about this is, is stock picking for everyone? How time-intensive is this? Most people, I think, probably should just be buying index funds, or what is your opinion about that? If you’re going to try and pick stocks, and follow the advice that you just gave, how time-intensive is it, and how much commitment do you need to do it well?

Chris:
It’s as time intensive as you want to make it. It truly is. There are a lot of very smart people I know who have done very well simply just investing in index funds for decades, and they just don’t have the interest. Maybe they have the time, maybe they don’t, but even if they have the time, they don’t want to commit it, and they do very well just executing that strategy, just methodically every two weeks, every month, putting money into an index fund. You do that for decades, you’re going to be in great shape. I think for people who want to take the next step and really build out a portfolio of individual stocks at The Motley Fool, from an aspirational standpoint, we really recommend that people look to get diversification in the form of 25 to 30 stocks in your portfolio. So 25 to 30 different companies ideally spread out over different industries. You’re not going to be diversified if you own shares of 25 different companies and they’re all in the software industry, that sort of thing.
I think that particularly early on, something you want to pay attention to is just to the extent that you can step back and evaluate how you feel. Not necessarily how your portfolio is doing, but just like, “How am I feeling about this? Is this something that I’m thinking about in the middle of the night when I wake up? Is this something that’s concerning me?” From time to time, we talk about the sleep factor, and I’m a huge believer in that. I’ve lived that as an investor that if you are losing sleep over your investments, you need to change the way you’re investing. I mean, I’ve absolutely had that happen not for a long time, I’m happy to say, but 15, 20 years ago, yeah, there were stocks that I was buying, and I would wake up in the middle of the night, and I couldn’t get back to sleep because I was just thinking about these stocks, and I thought, “I got to get rid of these.”

Dave:
Yeah. It’s just not worth it.

Chris:
It’s not worth it, and in the case of one of them, it was a stock that was up. It was not, “Oh my gosh, I’m losing sleep because I’m losing money.” I literally bought a business, and this is one other thing I’ll say in terms of for people who are thinking about buying shares of individual companies. I cannot recommend highly enough. The better you understand how the business works, the better you’re going to do as an investor, and the better you’re going to sleep. This was, I think, 2003, 2004. I bought shares of a biotechnology company. A friend of mine, who’s a very smart guy, had written a report about this company. I read the report three times. I understood maybe half of what this company did. I bought shares.
The stock went up something like 30% in a few months, and Dave, I was literally waking up in the middle of the night just thinking about this company, and I was just like, “I got to…” I sold the stock, I took the short-term capital gains hit. I just thought, “I’m never doing that again.” Again, to go back to businesses that you understand how they make money, it’s probably not going to be shocking to you that the company that I have done the best with as an investor is Starbucks. It’s a coffee shop. It’s a very big coffee shop, it’s a global coffee shop, but it’s a coffee shop. I understand how they make money. I understand that business better than any other stock in my portfolio.

Dave:
Yeah, yeah. That makes sense. It’s something you can relate to. You can physically go see it. It’s tangible, which definitely makes sense. I really like that idea of the sleep factor. I think that’s so true, and I love your story about just like even though the stock was doing well, because you didn’t understand the business, it sounds like you didn’t know if it was going to all fall apart or if the gains were real because you just didn’t really inherently know why it had gone up and whether it was going to go down.

Chris:
Exactly, and not surprisingly, science was not my strong suit when I was in school, so that wasn’t helping matters either.

Dave:
Okay. Yeah. Well, that’s going to shock… I’m going to have to get rid of half of the industries then by that criteria before I start picking stocks. But actually, that’s a good transition, actually, to what I did want to ask you about, which is REITs because I am interested in investing in REITs as a real estate investor, and I think a lot of people listening to this are probably interested as well. Could you just tell us a little bit about the current state of the REIT market?

Chris:
I can tell you a little bit. I’m going to start by recommending an episode of our podcast, Motley Fool Money. It’s our 2023 preview episode that we published in late December, and one of the analysts who was on that episode is Matt Argotsinger, a guy I’ve known and worked with for 15 years. Matt has a true passion for real estate and is someone who invests in real estate, has some Airbnb property as well. On that episode, he talks a lot about real estate investment trusts, recommends a few as well. One of the things he talks about on that episode is just… and this relates to the overall stock market as well is… We’ve seen it throughout history. There are times when stocks get sold off to such a degree that you can step back and go, “Well, wait a minute. I get that we’ve been in a rough patch here, but some of these stocks now seem absurdly cheap.” So part of what Matt talked about on that episode was some of the areas of the real estate investment trust market that he’s looking at and thinking to himself, “Okay. I understand everything that’s going on. I understand what’s happening with interest rates, but some of these REITs are looking… The assumptions built in are so pessimistic that this looks like a great opportunity for people who are interested in investing in REITs.”

Dave:
Oh, great. Well, yeah, definitely check that out. I’ll just mention to our audience, the reason I personally like REITs is because I’m a firm believer… Similar to your policy about stock market, Chris, is that as an investor in real estate, you should stick to somewhat what you know. You shouldn’t be… I’m mostly a residential real estate investor. I don’t buy office buildings, and I don’t really ever intend to, or industrial, or cell phone tower land, but they’re interesting businesses that do that and do well. I understand real estate well enough to understand the fundamentals of those business. I couldn’t underwrite one of their exact leases for a cell phone tower, but I understand the inputs and outputs, and it allows you to diversify even within real estate in a way that I find really valuable. So if you listening to this are also interested in doing something like that, check out that episode. What’d you say it was called, 2023: State of? What was that?

Chris:
The title of the episode is 27 Stocks for 2023.

Dave:
Okay.

Chris:
We published it in late December. One other thing I’ll add there that you just reminded me of, Dave, and this goes for stocks, this goes for real estate investment trust as well. There are people running these businesses, and one of the things that’s great about… I was talking before about companies that IPO, and they’re new to the market. Those can be exciting businesses, but part of what’s challenging there for stock investors is these are businesses that don’t have a great long track record, and this is a management team that does not have a track record of running a public business, and running a public company is so much more challenging than running a private company.
One of the things we like to see… Obviously, we focus on businesses, but we also, at The Motley Fool, like to look at, “Well, who are the people running this? What is their track record?” You can see great CEOs with long track records. Part of that great track record can be capital allocation. You see that in real estate investment trust as well where it’s, “Oh, this is a management team that has been in place for 10, 15 years. They’ve been through this before.” That’s part of what I think is interesting about this moment in time for investors is we’re seeing companies really go through their first sustained bear market in a long time, and we’re going to see how some of these management teams react. Not all of them are going to do great, but the ones who have been through it before, I think that’s the kind of thing that gives shareholders more confidence.

Dave:
That’s excellent advice. Yeah, I totally agree, and I definitely resonate with that. I mean, I started investing in real estate in 2010. I haven’t been through a downturn to be perfectly honest, so I think we’ll see a lot of businesses, real estate operators, and other recently IPO… Well, IPO-ed in the last decade or so. So that’s very good advice. There’s a lot of inexperience with these types of market conditions, this point of the economic cycle, and yeah, experience definitely helps during these types of times. Chris, we do have to get out of here, unfortunately. This has been very fun, but is there any other tips or advice that you think our audience should know about the stock market heading into the new year?

Chris:
You just reminded me of something that the great philosopher Mike Tyson once said, which is, “Everybody has a plan until they get punched in the mouth.”

Dave:
Yes.

Chris:
I think that, particularly for people who are new to stock investing in general, and I’m sure there have been studies that have done this, people overestimate their risk tolerance, particularly younger people, they think. So when you go through scenarios of, “Well, if you had a stock portfolio, and it fell 30% over a 6-month period, how would you feel about that?” It’s like, “Oh, I’d be okay with that.” What we saw in 2022 was the market in general having its worst year since 2008, and in some cases, individual companies losing 70% of their value. Again, it’s one more thing that nobody really talks about when they’re starting out investing. Certainly, when I was a much younger investor, no one was really talking to me about temperament and mindset. But the older I’ve gotten, the more I’ve come to appreciate those soft skills. Yes. There is math involved in stock investing, but it’s not complicated math. It’s the math that we all learned basically in grade school and middle school. It’s not advanced calculus. If it was, I would not be doing it.

Dave:
I say that all the time. It’s not, but I think… Remind me, Chris. That reminds me. I think it was in Morgan’s book, The Psychology of Money. So I read and listen to it a lot. It might be confusing it, but I think he says that one of the key things to do as an investor is to make a plan for a downturn during normal times. Was that in The Psychology of Money?

Chris:
Yes. One of the things he talks about is the margin of safety, and the point of the margin of safety is to essentially render it as a moot point. Eventually, you want to get to the point where you can sustain any type of downturn, and you want to do that with your own personal net worth. Again, to go back to some of the companies we were talking about earlier in the conversation, that’s where times like this favor large companies that have a lot of cash on the balance sheet, and they’re not as concerned about what’s happening with interest rates because they’ve got a big pile of cash sitting in a vault somewhere.
So, yeah, I think building up over time and getting to that point where you’re sleeping well at night and you can make it through a downturn… Downturns aren’t fun. Early in 2022, I was a guest on a wonderful podcast in the UK called Playing Footsie, and it’s these three guys who are much younger than I am. For those who are wondering why the name of the podcast is Playing Footsie, it’s a reference to the London stock market, the FTSE, excuse me. One of the things they asked me… This is early 2022, and the market is starting to turn, and it’s starting to look ugly. They basically asked me like, “This feels pretty bad to us, but you’re probably used to stuff like this. This doesn’t bother you, does it?” I gave them an answer that I’m sure they did not want to hear because I said, “Oh, no, this feels terrible.” It always feels terrible. It’s never fun when the market goes down, but the more you do it, the longer you do it, the more you realize that this is the advantage we have as individuals. We can play the long game, and any investor who played the long game always came out wealthier on the other side.

Dave:
That’s great advice for any asset class, honestly, just playing the long game. Time is your friend. Well, Chris, thank you so much for being here. You’re an absolute podcasting legend, and we appreciate you, you laying the groundwork for other finance and investing shows like ours. It was very fun to have you on, and hopefully, we’ll get to do this again sometime.

Chris:
It was my pleasure, Dave. Thanks so much for having me.

Dave:
All right. Big thanks to Chris Hill for joining us for this episode of On The Market. Just some final thoughts before we get out of here is it’s just amazing whenever I talk to anyone who’s an expert in the stock market, which I am not, but I think it’s just really fascinating about how the principles are so much the same. Right? It’s the same thing in real estate as it is in the stock market where time is your friend, right? Unless you’re flipping, most of the time, the longer you hold an asset, the less risky it is, the most profitable it’s going to be.
If you want to be accessing your money… I love when Chris said this. If you want to rely on this money in the next five years, you shouldn’t be putting it in the stock market. I think something similar can be said about real estate because you never know. Every kind of market, every type of investment has some level of volatility. It’s going to go up and down. Over the long run, it trends upward, and so that’s why the longer you hold it, the better it is. Same thing is true with real estate, and I love that he was just talking about quality, right?
Over the last couple years in the stock market, things have gotten wild where people were taking a lot of risk and betting on companies that weren’t foundationally strong. I think probably all of us have seen something like this in the real estate market too where people are stretching their underwriting a little bit over the last couple of years, and now the focus is returning back to those fundamentals, back to focusing on quality. So I loved talking to Chris. I thought it was great, and I know not everyone here invest in the stock market. As I’ve said, I do. I think it’s important.
Personally, for me, my risk appetite, my philosophy is that investing across different asset classes is a good way to diversify, and so I do it. But even if you didn’t, I think it’s just really interesting to learn about what’s going on in the stock market because these asset classes are connected. Right? It’s not like the stock market and what happens in the stock market is completely isolated from what happens in the real estate market.
Just as a quick example, right, over the last couple of years, we’ve seen the housing market explode. A lot of that or some of it at least can be said that people who made a ton of money in the stock market now had extra money that they were investing into the real estate market. You see that reflected in what Taylor Marr told us the other day, that demand for second homes went up 90% due to the pandemic. Sure, some of that was due to low mortgage rates, but it also happens to be that the stock market and crypto markets were going insane, and people had a lot of extra money to burn. So I think as an investor, it’s really important to at least have a good understanding. You don’t have to be an expert in every asset class, but have a good understanding of what’s happening in the stock market, the bond market, all these different markets because they do impact your investments. They do impact the housing market, and so hopefully this episode was helpful for you.
We would love to hear your feedback about it because honestly, we don’t always do these stock market shows, and we’re curious what you think about it. You can send me the feedback on Instagram where I’m @thedatadeli. You can find me in BiggerPockets, or we have On The Market forums on BiggerPockets where you can submit your feedback as well. So please hit us up. Let us know what you think of it. Thank you so much for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.