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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
This is where you take an oversimplified indicator, and you you now focus on rigidity with this oversimplified model, and you get whipsawed to death. Sometimes the hardest thing to do is the right thing to do, and that's just sit on your hands. Welcome to the Retire On Time Q and A podcast. I'm Michael Decker here with David Franson. This show is all about answering your questions, but not giving you that oversimplified advice you've heard hundreds of times.
Mike:We wanna bring context into the conversation. Now that said, remember this is just a show. This is not financial advice, so keep doing research. It's good for you. Alright.
Mike:Text your questions to (913) 363-1234, and we'll feature them on the show. David, what do we got today?
David:Hey, Mike. How do you know if you should sell something at a loss and move on or if you should hold on and wait? This is one of
Mike:the most difficult questions I think people face because we've been told, and this is kind of fortune cookie logic, if you will. Uh-huh. Fortune cookie advice is, you know, those who hold always, you know, are rewarded.
David:That's what Confucius say.
Mike:That's not true. Yeah. I mean, you held Cisco Mhmm. And you made a lot of money in the nineties, and then it dropped, and then you had to wait twenty five years until you cut your recovery. That's a long wait.
Mike:But then again, you've got other people that other stocks that they would have dropped, but then they recovered. Right? Like, Netflix has an infamous the first time they showed some some, I guess, less subscribers than the the previous reporting Oh. Their their stocks tanked.
Mike:But then they recovered pretty quickly. So there's two aspects here you've gotta consider. One is a macroeconomic kind of analysis, and the other is price exploration analysis. Let me Yeah. Define the two.
David:Tell us what those mean.
Mike:So one of the benefits of an ETF or an index or a fund is that you're diversified by buying a single thing. So you can basically get or the average of all of them, and then it flows up or down, and it's what John Vogel wrote his book about. You know, just buy the indexes, hold them forever, you're good to go.
David:And remind us, who is John Vogel?
Mike:He's the I think he founded Vanguard or was one of the creators of Vanguard.
David:Alright.
Mike:So he's known for being the buy and hold index funds kind of guy. And it kind of works. Indexes typically recover. All is well. That doesn't mean it's you bought the good indexes.
Mike:It doesn't mean that your indexes will always do well. Right? A bond fund index is different than the S and P 500 index, which is different than the Nasdaq 100 index, which is different from a small cap, large cap, international kind of index or an arbitrary this person's philosophy index or fund, I should say, because it's not really an index. But from a general standpoint, if you're buying funds, as long as you know what the general thesis is, the the intention, what they seek to do, you get kind of a reasonable idea with it. K?
Mike:So in that situation, the broad spectrum, you might hold. Just ask yourself, you know, is do I still wanna hold this thing? And and we'll talk about that later. But then you've got the other side of it, which is stock picking. Stock picking has price exploration, price valuation.
Mike:Does the price of that stock have merit? So let me give you an example. Let's say I don't know what eggs are actually costing today. Like $3 for a dozen?
David:Yeah. Is it still that high? Is it less now? Don't know. We I guess we don't do the shopping in our house.
Mike:Well, I do, but I don't pay attention to the price of eggs because I can't be bothered by it because it's it's so erratic. But let's let's say Uh-huh. That the price of eggs are $4 for a dozen.
David:Okay.
Mike:And if that seems high or low for you, then just pretend it's organic or cheap or whatever the difference is. Cage free. Okay. Yeah. So it's $4 for a price of eggs.
Mike:And you feel that that's kind of high. Uh-huh. Because you know a local farmer, got a ton of chickens, who's willing to sell it for $2. So you might say, I don't want to buy this thing. It's overvalued.
Mike:Right? You're exploring the price and the value it's gonna give you. I'm gonna go to the the local farmer and get it for $2 a dozen. Mhmm. Or maybe there's some crazy deal, and everyone else is selling eggs for $8, and you've you've you can buy it from this place or this farmer for $4.
Mike:Right? That's the so do you see how when you're shopping for things like eggs or milk or bread, people generally have an idea that it's overpriced or a good deal.
Mike:Are with me so far? Yeah. Okay. When you look at a company, what you're really looking at is their financial statements, balance sheets, their potential for growth, their expected you're looking at a company and the price that it is today and the price it could be in two to five years, let's say.
Mike:And so you can make an educated decision based on what you think that company is able to do and the direction it's going. So let me do an example. Right now in America, there is an issue with energy. The issue really is that AI companies take up a lot of energy.
David:So we've heard, yeah. Yeah. It's a lot of energy. Uh-huh.
Mike:And so there's this race for energy. And then you can look at, do you believe that the energy is gonna come from oil, natural gas? Or do you believe it's going to come from nuclear, and small nuclear, or established nuclear, and what kind of companies would deal in nuclear? Do you believe it's going to come from renewables, or green energy? How do you and then you have to consider, okay, which energy is going to the public grids.
Mike:Right? So, you know, the stuff that fuels our houses. Uh-huh. And then which companies are gonna work with tech companies because there's kind of a regulatory issue right now where they're supposed to pay for their own energy, so it doesn't screw over the do you see how you're now having to evaluate, okay, where is the energy company now? Are they able to expand?
Mike:What does that expansion look like? What does the future profits look like? And you're making an educated decision on, is the price today a good deal considering where you believe the price is gonna go in the future? And I'm not gonna give a master class in five minutes on how to evaluate a company. You might start at looking at their financials.
Mike:You might start by looking at the price to earnings ratio. And if it's higher, it might be considered more expensive. If it's lower, it might be considered cheap. The price to book ratio, these are just ways to start the evaluation of it. You've got discount cash flow as another methodology.
Mike:You can Google what's you know, pick any company. What's the discount cash flow of company XYZ? And Google will just do it for you based on their assumptions. I don't think does DuckDuck go? We always like give DuckDuck go the beauty of search engines.
Mike:You want them to win, but they're not. Or your AI of choice could probably do this pretty quickly.
David:Yeah.
Mike:But the point being is, is today's price a good deal or not a good deal? You can't do that with indexes. You can do that with individual stocks. With individual stocks, you take on more risk because it's more of a concentrated position. It's one stock as opposed to 50 stocks, 100 stocks, 500 stocks.
Mike:Right? Yeah. So there's this give or take situation. Now with stocks, you have to ask yourself, it's not just would you buy that stock today at today's price? Do you believe it's gonna recover?
Mike:And why is that? There's this balance between data and intuition. People that are all data are probably gonna be so fearful of the market that they'll never get in when times are bad. And when times are good, they might be fearful that, oh, it's gonna it's gonna crash again. There's always a reason that data might screw you over.
Mike:But then if you are all intuition, there's a good chance you're only gonna remember the good trades you made, forget the bad ones, and emotions may get the best of you. So you need to paradoxically balance both of these, have data and intuition, and look at the price valuation, and is it a good deal or not? And then you've got the indexes or a broad spectrum, and is there momentum? Is there a reason that that economy or that area is gonna go up or not? Any questions so far?
Mike:Is this helpful?
David:This is helpful. It sounds like a lot of work to do stock picking.
Mike:Well, is, and that's why people like index funds. Yeah. Like, they like ETFs because they don't have to do the research.
David:Right.
Mike:I mean, detriment is you can't really do effective research if there's 500 companies in an ETF. Yeah. But it's enough of a cluster that you kind of just get the aggregate, the average of it all, and it works itself out. So Yeah. Do you want better returns, and are you willing to put in the work for price valuation, price appreciation, price?
Mike:I mean, just your fundamental analysis, and is it expected to go up or not? Is it a good deal or not? Or do you want to just buy indexes and just ride them for better or for worse?
David:Now,
Mike:therein lies another layer of complexity to this. Okay? So a lot of people will oversimplify the purchase of an index and the sale of an index.
David:Oh, what do you mean by
Mike:that? So your amateur investor may say, well, if the market is above the two hundred day moving average, I'm going to buy and hold it as long as it's above the two hundred day moving average, which is just basically saying it's, by general definition, an uptrend.
David:Okay.
Mike:And if it crosses below, then it must be in a downtrend. I'm out. I don't wanna lose money. And in theory and from a generalization standpoint, it's not that bad of an idea, but you're not looking at the multiple layers that also can influence that. And so this is where you take an oversimplified indicator, something that may lend a conversation.
Mike:It's it's like, oh, that's interesting. And you you now focus on rigidity with this oversimplified model, and you get whipsawed to death. What what is whipsaw? Mhmm. Whipsaw is the idea that markets may trend one way and then change on a dime and go the other way.
Mike:So it's it's the kryptonite of trend following models. So Right. How do you solve that? You have to understand the tools that you're using. So if you're looking at indexing, index funds, and you want to be able to get in and out.
Mike:You just need to understand certain things like if you're going down the two hundred day moving average, you just cross below it, there's a 4% cushion or threshold where it's going to be very, very choppy before it might break down or it might recover quickly. So you don't want to act too quickly. Sometimes the hardest thing to do is the right thing to do, and that's just sit on your hands and do nothing. Then you've got, after that 4% threshold, okay, what are the other indicators that may affect the trend? Is it a geopolitical event?
Mike:Are there credit stresses to be aware of? I mean, it's a culmination of so many different indicators to really understand how to do a trend following model. And if you say, Hey, AI, build me a trend following model, it might just give you the oversimplified version. You get whipsawed. You end up doing worse off than you had just bought and held it.
Mike:Right. But buying and holding it isn't necessarily a good idea either because the markets can go flat and you didn't make money. So therein lies this idea that you don't want to make emotional decisions. You want systems, not sentiment. You want to have a system of when to buy and when you're going to get out of it, if you're going to get out of it, and what does that look like?
Mike:You want to do this in good times, not during bad times, so that when bad times happen, you already know what to do, you're not making an emotional reactive decision. So I just sent a ton of information. Let's read the question one more time to make
David:sure we
Mike:were answering it.
David:Make sure we did it. So how do you know if you should sell something at a loss and move on, or if you should wait or if you should hold hold on and wait?
Mike:So take emotions out of it. If you're doing stocks, is the price today a price that you'd buy? Doesn't mean it's the best price. I mean, you go shopping for clothes. Sometimes it's 10% off.
Mike:Sometimes it's it's 50% off. Right? Uh-huh. But if there's if sell a deal and you're okay with that deal, then you might hold it and wait until the price reaches the value you expect as long as there's no significant change. Let me tell you a quick story.
David:Alright.
Mike:So the company that does FICO, Fair Isaac Credit.
David:Oh, yeah. Heard of them? Yep. FICO Score?
Mike:Yeah. They had basically a soft monopoly. So we held them, and and and this was some time ago, but we would hold them, and it would go up, it would go down, it'd go every which way. Right? But overall, we liked the stock Mhmm.
Mike:Until there was a fundamental change, and you could basically get a mortgage through other versions of credit ratings. Oh. They lost their fundamental analysis or not. They lost their fundamental competitive side of their business. The price then changed on a dime.
David:Yeah. Because they lost that soft monopoly?
Mike:Yeah. Yeah. Now other people could come in, they could generate their revenues, and yeah, they can make some subtle adjustments to how they did business, but it wasn't the same business anymore. Uh-huh. It forever changed.
Mike:Therein lies the shift in the price that you would expect, and a lot of people, including us, just sold right away. Mhmm. So you have to understand, is it a temporary shift because someone got emotional, the markets got emotional, and they're reacting too quickly, but the price still holds with the stock and it's still a good deal and you're planning to hold it for a couple of years, then maybe you don't sell. But notice you're making a decision based on a system. Ray Dalio is a great investment.
Mike:I mean, he's an incredible hedge or not hedge fund, fund manager.
David:Okay.
Mike:I think he Bridgewater Associates. He's one of the largest fund managers in the world, and he always operates off of principles. Does this follow a principle that we believe in or not? And that helps him make informed investment decisions. So that's kind of on the stock side of things.
Mike:And if you're looking at trend following models or trying to find momentum in the market, be careful with those systems because you don't want to get whipsawed into losing money, you don't want to make a fear based decision, you don't want an oversimplified trend following algorithm that really is just going to hurt you. Yeah. Unless you know what you're doing. I mean, it's like technically anyone could do open heart surgery on you.
David:Yeah, right.
Mike:I'd prefer a heart surgeon that's gone through the training and understands the nuance of it. But technically anyone could cut you open and try and stitch you together. Yeah. Technically.
David:Yeah. If you have a scalpel and the 10 fingers, you could do it.
Mike:I've just found too many people online have an oversimplified strategy that they just kind of came up with theoretically. They didn't have the background to understand what they were doing, and maybe they got lucky or maybe they got their shirt taken from them or whatever. Mhmm. So just proceed with caution. Be careful.
Mike:That's all we got for for this question. If you enjoyed the question, enjoy the conversation, don't forget to subscribe wherever you get podcasts or on YouTube. And as always, go to retireontime.com for our book, resources, and so much more. That's retireontime.com. We'll see you in the next show.