How to Invest in the 2020 Stock Market Bubble...

Hey guys, welcome back to the channel! In this video, we're going to be talking about how we as investors should be approaching the topic of investing right now. Man, 2020 has been a whirlwind year, not just in general but also in the stock market. Somehow, in the last eight months, we've seen the stock market go down 35% and then up 50%. Right now, the S&P 500 is basically at the exact same point that it was before all this started happening. So, before the crash started, the S&P 500 is now at the exact same point. It is a difficult task. How do we go about our investing in these current conditions, especially with the bubble that seems to be forming in the stock market? So without further ado, let's get into it.

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So how should we as investors be approaching investing right now? Well, I think that if I had to answer that question in one word, I would say cautiously, okay? Because what we've seen so far in 2020 is we've seen, you know, February into March—that's when the business restrictions really came in. That's when the lockdown was really at its strongest. Business basically ground to a halt, and that's when things were really sketchy in the market as well. You know, we were wondering, is this the new normal? Is the vaccine ever going to come? You know, investors were spooked. There was a lot of fear, and there, more importantly, was a lot of uncertainty. And that uncertainty was enough to drive the stock market down literally 35% in record time. It was just like that. In the space of just a few weeks, we'd lost about 35% of the S&P 500.

Then we fast forward to March the 23rd. That was the tipping point because, remember, the Federal Reserve came out and they said, "Don't worry, guys! We know things are looking sketchy, okay? Unemployment's skyrocketing—it's up into the double digits. Okay, yes, we're looking at a considerable drop to 2020's GDP, but we are here to save the day!" They came out and said that they are going to do everything in their power to ensure the stability of the U.S. financial system and to help businesses. Now, obviously, that's good for business, right? And it's good for investors because we're putting our money into these businesses.

So the Fed announced that they were going to print a ton of money, okay? And they announced several different schemes to help businesses be able to get through the lockdown basically unscathed. So much so that really restored investor confidence, and we saw the stock market bounce straight back up. It's just been on an absolute charge since March because the Federal Reserve keeps coming out and they say, "Look, we're going to keep interest rates low. We're going to keep printing money. Everything's going to be fine." You know, if you're an investor in, I don't know, Amazon or Netflix or whatever, and if they need to take on more debt, if they need access to that money, don't worry—we got their back. They're going to be able to access more money because the Fed is printing trillions of dollars. They are buying the debt of the government; they are buying government bonds; they're even buying corporate bonds. They're putting in all sorts of different initiatives for businesses to get their hands on more money, so that has renewed the confidence for investors to get back into these businesses.

Of course, with investors flooding back into these businesses, their share prices go through the roof. Until here we are; we've bounced all the way back to exactly where we were before the shutdown started. S&P 500 at the exact same level. So investor confidence has been brought back, and the stock market has bounced back up purely based on the Federal Reserve coming to save the day. And that's where you've probably encountered the saying recently: "The money printer goes brr." The stock market certainly hasn't been dragged up due to economic indicators because, of course, if we look at those, they're still looking, quite frankly, terrible. Unemployment is still in the double digits, and if we look at what the predicted GDP is from the United States, it's not looking very good for 2020.

So this situation, what we're in right now, actually sounds pretty good for investors, and generally it is because the Fed's come to save the day. However, what about if you're a brand new investor? You're just looking to get started right now and getting into the market. Why do I think that you should be cautious? Well, the first key point—there's kind of two key points why I think this is the case. The first key point is quite frankly the Fed can't do this forever. If they print too much money too quickly, then the supply of money vastly outweighs the production of goods, okay? And if you find yourself in that situation, you can get quite steep inflation. Already, over the past few months, we have seen the Fed's balance sheet just balloon, okay?

And we have to ask ourselves the question: what happens to business when that help stops, when the backup that is the Federal Reserve can't really help out too much more? Okay, yes, there are going to be those companies that have protected their balance sheets over the past few years—they're going to do just fine, okay? If they can continue their business relatively uninterrupted, they've got cash in the bank to make sure they won't go bankrupt; they're going to be totally fine. But I'm thinking more about what about the smaller businesses? What about the ones that haven't protected their balance sheets? What about the ones that are going to see severe impacts to their business for literally not months but years to come? I'm talking about any company to do with tourism or travel—airline companies, cruise line companies, even some restaurants. You know, what happens to those companies?

So that's the first point why I think investors need to be cautious—it's because we need to factor in what happens to business when the safety net gets taken away. Now, moving on to the second reason why we as investors should be cautious: this is a direct consequence of the actions that we've seen from the Federal Reserve, and that is that stock prices have been inflated a long way away from reality. Despite what is happening just in the world around us right now, we're currently seeing, for example, a Schiller PE sitting at about 31—that is double the historical average.

What if we look at the Warren Buffett indicator, the Wilshire GDP? Well, same story. We're currently seeing Wilshire GDP of 190%. Remember, that one indicates a sketchy market at any time over 100%. I mean, you look at 1999; you look at 2008—both of those times, they hit 100%, and then all hell broke loose. Right now, we're sitting at 190%. So if you just blocked out all stimulus and you could only look at those two indicators, what those indicators are telling us is that right now really, we should be experiencing a golden age, right? The economic conditions should be, you know, two times more favorable for business than what we historically see.

And I don't know; I don't think that's the case. In fact, I'd probably argue that economic conditions right now are two times worse than normal historical conditions. But the real problem here is the fact that now these valuations are just so far away from the economic reality that we're in, okay? Because what you typically find—imagine this: over time, if we look at the S&P 500, there's going to be a line that represents the value of the S&P 500, what the S&P 500 is actually worth, and then what we can do over the top of that line is we can overlay what the price of the S&P 500 is at that particular time.

Now, over decades and decades and decades, there are going to be times where the value and the price are exactly the same. Then there are going to be times where the value line sits above the price line, okay? So the price is below the value, and that is what we as investors love to see because that's when we can buy low. That period of time where the price is underneath the value—that gives us a margin of safety. That's when we can buy at a discount to intrinsic value.

Okay? Then we also have times in history where the price line sits quite substantially above the value line. Now, what we have to remember is that as we continue to move forward, there are going to be periods of time in the future where eventually the price line and the value line match up once again. What we're seeing at the moment is that the value line is going like this and the price line is going like that. And the further those two numbers diverge or the further those two lines diverge, it sets us up for a bigger correction. The two lines are going to meet once again in the future.

Now, there are two ways in which those two lines can meet once again, okay? You can either get the value going up substantially—that's less likely in my opinion—or you can get the price coming down substantially. To me, I think it's going to be the latter because we've also got to factor in we're currently facing a lot of headwinds for business, whether it be unemployment, reduced spending, business shutdowns, changing rules, okay? The U.S. election, the Federal Reserve having to slow down the money printing—there are so many different economic factors that we're seeing right now that act as headwinds for business.

So it's that reason I think it's more likely that we're going to see prices coming down as opposed to values going up. So that's why I'm saying at the current time, when we're thinking about investing right here, right now, at this current level, we have to be cautious because it looks like the market is getting into bubble territory once again.

Now, let's move on to talk about, well, how does that actually influence our investing? Okay? And I always say this; I've said that this in many videos in the past. Whatever the market's doing, it shouldn't actually influence your investing strategy, right? Your investing strategy, if you are someone that likes to pick individual businesses to invest in, your strategy should always be: find businesses you understand, find businesses with a competitive advantage—all right? An economic moat—then check the management. Make sure the management team operates with skill and integrity. If you got those three things ticked off, then move on to valuation: run your valuation measures, owner's earnings, discounted cash flow, margin of safety— and then only buy that company when the shares are at a discount to intrinsic value.

Back to what we were saying before: we buy when the price line is considerably below the value, okay? Because that's our margin of safety, and the world's best investors do that time and time again. That's why they're the best investors—they are patient; they wait until they find businesses that they like when they can buy them at a share price that is at that margin of safety price.

So overall, we shouldn't be changing our approach to investing. The thing that you will find is that because we're starting to see that stock market bubble form, as the market just goes further and further away from reality, it's going to be harder and harder to find great businesses that are at those marginal safety prices. But in times like this, we're going to remain patient. There's not no deals out there, okay? There's always a deal somewhere. We've just got to find it.

So in my opinion, that's how we should be approaching our investing right now, late 2020, after the stock market has bounced back 50%. That's remarkable! It really, when I sit back and I think about it, the stock market's gone up 50%, and what we're seeing in the world around us right now—it just makes no sense. But I guess that's the power of the Federal Reserve, right? Shows you how quickly investors can regain confidence with the Federal Reserve standing behind them.

Anyway, that's it from me for today. I'd love to hear your opinion down in the comments section below, so make sure you drop me a comment and put a like on the video if you did enjoy it or if you found it useful. But that's it from me for today! If you wanted to learn more about my personal investing strategy—the investing strategy I just spoke about, finding high-quality businesses and buying them at margin of safety prices—if you want to walk through that strategy, then check out the links down in the description. Head over to Profitful; you'll be looking at an introduction to stock analysis. If you just want to learn about passive investing, you can also check out Stock Market Investing for Beginners.

And if you're an Australian looking for some tax time help, you can also check out the two tax courses that we've just put up on Profitful. But that will do me for today, guys! Thank you very much for watching, and I'll see you in the next video.

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