The Upcoming Stock Market Collapse | Round 2

What's up, you guys? It's Graham here. So, you know the saying, "What goes up must come down"? Well, it's been coming down a lot lately. And it just goes to show you that a lot can happen in a week because just a few weeks ago, the S&P 500 logged one of its best quarters in 30 years. During that time, the entire market seemed to be on this upward trend of profit and more profit and even more profit, to the point where it didn't really need to make any sense. All you needed to know is that green is good, red is bad, and as long as you stay away from the red, you're gonna be in the green. That was until now.

For what initially seems like absolutely no reason at all, the stock market began going down. It was kind of like the stock market had a bad day, so it decided to go back to bed and then was like, "No guys, you've been making too much money lately, here's some losses for everyone who bought in this last week. There you go, go away." And now that's led to more speculation about this upcoming double-dip stock market collapse that's been talked about ever since the recovery in April. It's enough to make any investor question what they're doing and whether or not it's a good idea to buy the dip and attempt to catch a falling knife.

But when it comes to investing in 2020, here's everything you need to know: why the stock market seemed to have sold off out of nowhere, how this is speculated to maybe be the doings of a company called SoftBank, and then we'll talk about what I'm sure everyone wants me to mention, and that would be Tesla, who recently had their worst stock day in over 10 years and the reason why they did not get into the S&P 500.

So with that said, you know the deal—let's destroy that like button for the YouTube algorithm until it turns blue. Let's all actually do this at the same time here, okay? I'm going to count down. Ready? 3...2...1...

And, well, really quick, here's a bit of a background. Obviously, since the beginning of March, when the stock market plummeted about 40 percent in a matter of weeks, the Fed stepped in. A two trillion dollar CARES Act was passed, and even though the unemployment rate was sky high and our entire economy was still shut down, our stock market began to recover, led primarily by tech stocks. That part makes a lot of sense to me. As everyone begins working from home and using online services, it's inevitable a large portion of that demographic and their money are going to be pouring into those companies.

We've seen the likes of Amazon, Apple, Netflix, Microsoft, Google, all reach their all-time highs by a lot during one of the worst markets we've seen in a long time, and it's easy to let this slide without question because at the end of the day it is tech, and it's now integral to our everyday lives. But things have begun getting a little bit questionable over these last two weeks for really no reason. The tech market started to rise out of nowhere. Now, sure earnings were better than expected, but it wouldn't take that much good news to send a stock price soaring 20 percent overnight.

Just take a look at Nikola stock, which does not even have a working product, but just yesterday they went up 40 in value on a deal with GM. Don't even get me started on Kodak! Anyway, that led a lot of investors to fear this irrational exuberance, led more so by the excitement of making money rather than the stock's actual fundamentals, and that then led to this article being published, citing that Robinhood investors need to be burned a little bit.

Now, Warren Buffett has a really great saying when it comes to this and how to spot an irrational market: people start being interested in something because it’s going up, not because they understand it or anything else. And it usually begins when they see their neighbor, dumber than they are, getting rich. In other words, when someone else makes investing look easy to the point where you start getting the itch to jump in yourself because if they can make money, you can too. That's a bad sign, and that should be the first tip-off that maybe you should take a step back and really realize why you're investing in the first place and whether or not you could risk this money to a lot of volatility.

Meanwhile, and now that brings us to today. Over the last four days, the S&P 500 has lost about seven percent by the time I'm filming this, and the Nasdaq is down about 10. So what just happened? How much worse can this get, and is this the start of that double-dip recession that everyone has been talking about for months now?

First, we need to talk about SoftBank because this could, in theory, maybe be responsible for some of the recent stock market rally, and then subsequently the quick decline. Now, for anyone not aware, SoftBank is an investment conglomerate and holding company worth somewhere around 113 billion dollars, and lately, they seem to be the center of a lot of controversy. First, we can talk about the somewhat defunct investment in the company WeWork.

Now, for anyone not familiar with WeWork, what they are is a public working space—at least office buildings—and then turn them into many workstations for people to then rent. The concept was actually pretty interesting and had a lot of potential, so much so that the CEO of SoftBank decided to take a gamble on it and become their biggest investor. Then, when WeWork planned to go public in IPO, their S1 filings came out, and it turns out the CEO was involved in some very questionable practices. And yeah, their initial $47 billion IPO turned out to be a complete disaster, and within a short time their valuation was reduced down to $2.9 billion, as of the most recent article.

Instead of chalking this up to a loss, SoftBank decided to double down, invest more money in the company in an attempt to revive it. Then there's also Wirecard, a company which is missing two billion dollars on its books, and now SoftBank is under scrutiny for a questionable one billion dollar investment into the company. Then there's also Uber, a company that SoftBank has also been investing in that's yet to turn a profit.

Now, to be fair to SoftBank, they do make a lot of different investments in many companies, and it's inevitable that over time a few of those investments are going to stand out. But the CEO is known for taking some very big gambles and risks on companies where some of them just end up paying out big. Their most recent gamble could have something to do with why the stock market went up.

An article published by CNN explains how SoftBank could be the Nasdaq whale that has the power to manipulate the entire market. And here's how that works: SoftBank invested $4 billion in certain tech companies through what's known as a call option. This means SoftBank pays a small fee for the rights to buy a certain stock by a certain date at a certain price, and then if the stock price goes up, they make money. But if the stock price goes down, they just decide not to use the rights to buy the shares, and they lose the option money they paid up front.

It would kind of be like you going to me and saying, "Hey Graham, I see you have one share of Tesla. Well, guess what? I will pay you one dollar for the right to buy your share of Tesla for $340 on September 30th of this year." In that situation, obviously, if the price of Tesla is lower than that, then you go to me and say, "Hey Graham, you know what? I'm good, I'm not gonna buy your Tesla stock. You get to keep my one dollar, thank you very much."

But if the price of the stock is higher than $340, you get to go to me and say, "Hey, do you remember how I paid you one dollar for the right to buy your Tesla stock for $340? Well, guess what? Now it's $400, so you got to sell me that $400 stock for $340." And now I made a quick $60 profit. Well, that's what SoftBank did, except with call options, they're multiplied by a hundred.

That's right, when you buy one call option for a stock, what you're really agreeing to is buying that stock times a hundred. And when SoftBank invests $4 billion into the market with call options buying certain stocks at the same time, they have the power to potentially move the entire market alongside with it because someone else has to buy those 100 shares to make the transaction possible.

That now brings the theory that possibly traders like this have the power to influence the entire market either up, as we've seen recently, or down when they begin to sell. This is just one theory as to why we've seen the recent run-up in tech prices. As prices began to go up, more people began pouring in, causing the price to go up even higher. More people poured in, causing that price to go up even higher, and then everyone else sees that you're making money in tech stocks and they decide to buy in, boosting the price even higher.

And then, of course, that also works in reverse. As soon as people begin selling and taking profits, people begin to panic, selling off their investment too, causing other people to sell off their investments, and then all of a sudden it's a free fall just because everyone panicked out of nowhere. Of course, all of this is just a theory, but it's also important for you to understand how market psychology works so you could be better prepared and know what to expect.

That's why they now say we could be entering into a stock market correction where the market falls 10% from its previous high. Corrections like this are not uncommon, and they happen from time to time. And if anything, it's healthy for the market to pull back a little bit. People can cool down and then the market could settle into a more clear trajectory and path.

Now, as far as what you can do about it, honestly, I don't see it as that big of a deal, and I've been using this as a time to load up on even more S&P 500 index funds. Here's the thing: for something like this, everyone just needs a little perspective. Like just take a look at this, even though the five-day chart of the S&P 500 looks disastrous, we could move out to a one-month chart and all of a sudden we realize that where we are today is the same place we were a month ago.

Now, here's the real eye-opener. If we zoom out to a six-month chart, that is the dip that so many articles are clamoring about. We saw a worse drop from June 8th to June 11th before everything began recovering and going back up in price. But in all seriousness, once you see the bigger picture, you start to realize that a 7 to 10% drop like this is nothing to panic about. It's nothing to worry about, and it's normal.

And even if we zoom out even further, over five years, this recent dip is just a blip on the radar and it pales in comparison to many of the other routine drops that we've seen in the past. Now, I get it, this is not any sort of scientific, professional technical analysis here. That's not the point of this. Instead, it's just for you to realize that drops like this are normal, and it's nothing to panic about as long as you plan to hold long term. Just see any dips like this as a flash sale. Just buy more, hold long term, and in the bigger picture, it doesn't really matter.

And who knows if the market's going to go down right after I post this video or if it's just gonna go up by the time it's posted? No one knows, except maybe SoftBank.

Well, guys, I'm editing this right now, and it went up. So for that reason, the only strategy that we could employ is just to buy consistently as normal. Hold. That's it. However, if you're investing in risky stocks with no knowledge about what you're investing in with the only intention of trying to make money as fast as possible, then yeah, you're probably best off selling your investment now until you have a better understanding and better grasp of what it is you're really investing in and why. Only invest in index funds and stocks you really understand the fundamentals of, and that would apply to 99% of you. Just buy index funds, hold. That's it.

Keep buying. And now, let's talk briefly about Tesla not getting into the S&P 500 and its 35% decline in a matter of a few days. Now, here's the thing: in order to be included in the S&P 500, a company must hit certain requirements, one of which being four recent quarters of profitability, which technically Tesla just hit. However, just because it meets the criteria to be eligible doesn't mean it's automatically going to be included.

There is a committee of nine members who meet every single month and decide who gets to be added in and who gets to be booted off. They're kind of like the cool kids' table in Mean Girls, who decide who gets to hang out with them and who doesn't. No one exactly knows what this committee looks for and how they vote, and that information is not published ahead of time.

Well, lo and behold, Tesla recently announced a five-for-one stock split, and the price of the stock went up about 80% within a few days for no real reason other than the hype of it just being a stock split. And now it's become apparent that no, they're not going to be added to the S&P 500, at least right now.

Now, even though we don't know the real reasoning behind this, it's speculated that Tesla might just be too volatile right now to be added to the index. And for any stock to swing a plus or minus 30% in a matter of days at a valuation of over a hundred billion dollars, it's really not a company best suited for positioning within an index right now.

It's also unclear if Tesla will continue to remain profitable or not because technically $428 million of their revenue came from selling regulatory tax credits to other car companies. I have a feeling that if Tesla stabilizes and it becomes profitable long-term, most likely it will be added at some point in the future, but it's gonna be done at a time where nobody's gonna be expecting it.

Now, I'm still a fan of Tesla, and I'm still holding on to my entire position right now without selling it, but it's a risky company, and I cannot justify myself buying more into it right now. That's just me. To each their own, and I'm just gonna be patiently waiting this out to see what happens, for better or for worse.

So now, in terms of where we stand today, to be honest, I'm not that surprised the market has fallen so much over the last few days. The stock market has risen almost every single day consistently for almost two weeks in a row. There is no real reason for that, and as logical as the stock market could be, just like we can't question why it's going up, we can't reason why it's going down. It just does whatever it wants to do when it wants to do, and that's really it.

It's really up to us to enjoy the ride and have fun watching it. But like I said, at the end of the day, the only thing we could do is buy and hold. Now yes, technically, the fundamentals behind some of the recent valuations of tech companies have been absolutely atrocious, but they've never fully made sense. And a company like Amazon has always traded above its worth for many, many, many years now.

That's why there's the saying, "The market can remain irrational longer than you could remain solvent." And keep in mind, the SoftBank explanation is a really fun theory to think about and talk about, but who knows how much that actually influenced the market or if it just bumped it up enough to get people to buy in who caused more people to buy in, and then all of a sudden it's self-fulfilling.

The point of this video is really just for you to see the bigger picture and see that dips like this are normal and nothing to worry about as long as you're a long-term investor, you're properly diversified, you consistently buy over time, and of course, you smash the like button for the YouTube algorithm, you're gonna be totally fine and well on your way to one day becoming a mini Warren Buffett.

So with that said, you guys, thank you so much for watching. I really appreciate it. As always, make sure to destroy the subscribe button and the notification bell. Also, feel free to add me on Instagram. I post pretty much daily, so if you want to be a part of it there, feel free to add me there as my second channel, The Graham Stephan Show. I post there every single day I'm not posting here. So if you want to see a brand new video from me every single day, make sure to add yourself to that.

And lastly, speaking of stocks, if you want a free stock worth a minimum of eight dollars all the way up to a maximum of sixteen hundred dollars, use the link below in the description, and Webull is going to be giving you that free stock when you deposit $100 on the platform. So if you're interested, enjoy that free stock. Let me know which one you get. Thank you so much for watching, and until next time!