Spring is here! 

The temperature is rising!

Birds are chirping!

And… wait a minute.

What’s that smell?

Is that… blood in the streets?

Oh… oh god… 

Oh no no no no no…

The market really does look like a battlefield right now (warning: don’t click that link if you don’t like violence, heavy metal, or satire). 

Look, if you’re invested in the markets, I get it. 

When there’s a widespread selloff in the markets…

The value of everything goes down. Good assets, bad assets, and everything in between. 

People are scared. A lot of folks are losing money. 

If you read forums like Reddit, you’ll see tons of posts from people writing things like “I crippled my future and lost all of my life savings.” 

I’ve been getting a lot of questions from friends and family: What’s going on? Is now the time to sell? Is now the time to be buying? Are we going into a recession? When will this market stop falling?

If you’re watching the market decline, you might have the same questions as well.

But all things considered, I will be honest with you:

I just haven’t been stressed about the markets in 2022.

And unless you poured all your money into risky tech stocks and cryptos hoping for a lotto ticket… you shouldn’t be stressed right now, either.

I’ve been talking about how I moved most of my money out of the markets back in May 2021 (see this post). 

I also predicted this crash in mid-December of last year, and gave people advice based on what I was doing so they could protect themselves no matter what happened.

So far, my strategies have been paying off.

Well, for me at least.

I just checked my 401(k), which holds a mix of “Legacy Stocks” and growth stocks like the ones I recommend in the Finance Daddy Dollar Trader and that I plan to hold for at least 10 to 20 years. 

So far, that portfolio is up +9.8%, year-to-date. And I have cash ready to deploy to buy more.

My IRA? That portfolio is basically flat, because it’s almost entirely in cash (and $SHV). 

I also haven’t been affected by the crypto crash. I sold almost all of my crypto in late January 2022. 

And my $10 Daily Investment challenge? My total return so far is about -7%, so I’m still beating the market and collecting a nice dividend check every month. 

But based on what I read online, I feel like I’m the only person on the planet who’s actually making money in this market. 

Is it because I’m some mad super genius who cracked Wall Street’s secrets?

I mean… that’d be nifty. 

But I’m just a guy. A former English professor turned stock analyst and financial writer. A dad and husband who doesn’t want to stress about money that much.

Really, all I do is look at what’s happening, make some models to see what could be the end result of what’s happening, and tread lightly from there by keeping my risk low and avoiding stupid bets. 

So let’s talk about what’s happening…

We’ll go over WHY this bloodbath is happening…

We’ll go over WHAT I’ve been doing that’s been producing good results for me…

And I’ll give you a braindead simple way to come out of this mess both richer and happier.

(It’s an investment strategy practically anyone can follow, even if you don’t have much money.)

But BEFORE ALL OF THAT… 

Let’s go over something super basic. Like… really basic. A question I don’t think most regular investors know the answer to:

Why Do Stock Prices Go Up and Down?

This might seem like a simple question, but very few people know the real answer…

And if you follow the mainstream news, you might think that stocks go up and down in price because of inflation, or interest rates, or Fed monetary policy, or infrastructure spending, and so on. 

But in truth, stocks move based on millions or billions of decisions tallied together… all of them made by everyone ranging from your uncle to the algorithms that control passive index funds. 

Stock prices go up when people are buying and want to keep buying more. (Demand for stocks goes up + supply of stocks goes down = prices rise.)

And prices go down when people are selling and want to keep selling more. (Demand for stocks goes down + supply of stocks goes up = prices decline.)

Now, I’m going to give you a bunch of information about the economy and what may or may not happen to interest rates and inflation and more… 

But I do not want you to interpret these as direct causes of the market drawdown.

The direct cause of a market drawdown is always people and institutions deciding to “sell.” 

Really, it’s not more complicated than that. 

So whenever you read a news report that says “Market down due to Fed Rate Hikes/Hot Inflation/a Government Jobs Report”...

I want you to keep in mind that these things do not cause stocks to go down in isolation. 

People are only ever motivated to buy because they assume the value of things will go up. 

But people are motivated to sell for all sorts of reasons. 

Those reasons can include but are not limited to anything that causes people to experience fear, uncertainty, and doubt. 

And a really, like stupidly easy way to make money with stocks is to take advantage of short-term fears for long-term gains.

Later on, I will even prove to you, historically, that this has been true for decades. 

But right now, let’s go point by point through some of the major fears investors are experiencing and draw some rational takeaways about what’s happening and how we should invest.

Fear: “The Market is in a Bubble”

The term “bubble” is used to scare investors. 

But all a “bubble” means is that the price of an asset seems to be way above what it’s actually worth, what it’s valued at, or what it actually does.

I use the verb “seems” intentionally…

Because the measures of what something is worth? 

They’re all subjective and constantly changing. 

There’s no universal or divine law that says “the true intrinsic value of an asset shall only be based upon the ratio of its price to its earnings.” 

It’s all just math… that is, it’s nonsense.

Valuation measures are all models, invented by humans (usually economists and accountants – the second-worst kind of people), most of which are less than 100 years old.  

These models then get used by other humans — typically financial experts (the first-worst kind of people) — to inform their decisions. 

If a model works for these early adopters, it makes the models appear to predict the future. Which causes more humans to start using the same models to inform their decisions.

This cycle continues until the valuation model becomes so overused that it loses its predictive power. That is, what the model “predicts” in the future becomes priced into the market in the present.

This results in some models being more predictive of future asset values than others at different times…

And for that reason, some valuation measures become fashionable or unfashionable during different economic conditions. 

For instance, in mid-to-late 2020, the best way to pick a winning stock was using the forward price-to-sales ratio. Profits didn’t matter — the highest returns came from the fastest growing companies. Most of the biggest gains in my Next Boom Report newsletter resulted from using this and other growth models.

This paradigm changed, of course, as a result of inflation and rising interest rates, both of which make the future value of money worth less. 

(I will bet money, however, that the companies — tech stocks included — that produce the best returns in the next few years are the ones generating lots of free cash flow and that steadily increase their dividends. $TDIV is not a bad place to start, if you’re looking for something to buy that hits some of those characteristics.)

So whenever you read that something is in a “bubble,” what we’re talking about is not reality… rather, a “bubble” is a function of human perception and then justified with math.

This makes bubbles a relatively common phenomenon. The book Pop! by Daniel Gross actually makes the argument that bubbles are good for economies. 

And for investors? Bubbles simply make investing a bit more precarious in the short term. 

Basically, the fact that everything seemed to be in a bubble starting in 2020 (by most valuation methods) simply made assets vulnerable to what happened in 2021 and 2022. 

This is one of the reasons why the current market implosion doesn’t worry me… 

The current drawdown feels like a natural sell-off that’s driving assets back toward prices (and valuations) that actually make sense, based on historical averages. 

So… when will the stock market no longer be in a “bubble”?

We’ll use the Nobel-prize winning Shiller CAPE ratio to answer this question… 

For the CAPE to drop below its 20-year average…

The price of the S&P 500 either needs to decline below about 3,370 (it’s at about 3,887 as I write this)…

Or the average of U.S. corporate earnings over the last 10 years needs to increase by about 15% from here (which probably won’t happen for at least a few years). 

This is one reason why I have been investing in and recommending individual stocks and not the overall market for the past year…

As a whole, the market still looks overvalued, even after this drawdown. 

But individual stocks have been looking exceptionally attractive by this same measure…

Especially financial services companies ($XLF). 

Takeaway: Bubbles shouldn’t scare you or dissuade you from investing. Not every asset is overvalued, even if the market is overvalued overall.

Fear: “Inflation is Too High”

Longtime readers know that I’ve been warning about the prospect of inflation for a while, and in August 2021 predicted that inflation would max out between 9% and 13% by mid-2022. 

So far, my prediction is on track, with U.S. CPI Inflation rising 8.26% in April 2022.

Let me state, off the bat, that I don’t like most measures of inflation–especially the CPI. 

As with valuation models, no economist actually knows what the true rate of inflation should be for an economy (especially one with a “fiat currency,” or money that isn’t backed by an asset like gold). 

And the notion that inflation needs to be around 2% per year is only about 33 years old.  

Plus, one of the main measures of inflation, the CPI, uses calculations that “smooth” out volatility in prices.  

Meaning: The 8.26% reported inflation rate might be far below what people are actually experiencing in their daily lives. 

The real rate of inflation is probably higher (much higher) than what the government reports.

So when it comes to inflation, all we know is one thing with reasonable certainty:

Without price stability, economies break down.

And without price stability, we also can’t rely on any valuation models that use growth estimations. 

So let’s ask ourselves…

What is mainly driving the current explosion of inflation right now? And is this going to be a persistent problem?

To answer the first question, let’s look at the different factors that go into the CPI calculation:

As you can see, most of the spike in inflation over the past year is being driven by just a few items: Transportation, food, and commodities.

But what we find, here, is some mathematical trickery as well. 

Just take a look at the rate of change for these three classes of objects:

If you zoom out over the last 10 years, these have grown at an average rate of 2.3% per year, 2.7%, and 1.7%, respectively. 

That's awfully close to the arbitrary 2% target inflation rate.

So what I’m about to say is a little controversial…

It might even make you mad to hear this…

But it seems to me, looking at these numbers, that this spike in prices is only causing concern at this moment because of human perception. 

That is, American consumers got used to cheap things that probably shouldn't have been that cheap for the past 10 years, all things being equal.

Forget “Bidenflation,” forget government overspending, forget corporate profiteering, forget all the partisan political nonsense.

If these prices had, starting from 2012, gone up at the rate the Fed is targeting? 

They’d be pretty much the exact same as they are now and no one would be batting an eye about it.

This is actually one of the myriad reasons why I suspect the Fed has been slow to raise interest rates. 

If prices level out from here, the inflation we're seeing is going to look more like things getting suddenly and violently back on track.

And that brings me to the second question I posed: When will inflation “level out”?

The honest answer to that is: No one knows. 

Price stability will likely return to the global economy when the supply chain crisis becomes less of a crisis… when China and other countries stop issuing total lockdowns due to Covid… when the war in Ukraine ends… when there’s no longer a global food shortage… and more.

However, at this moment, the financial market is betting that the average rate of inflation over the next 5 years is going to be 3.08%. 

Mathematically, that will only happen if we see less than 2% inflation between 2023 and 2027. 

Practically, we’re only going to see that if central bank interest rates go higher, even though there’s probably a cap to how high those can go in the near future (as I discussed here).

Takeaway: Inflation figures do not reveal everything about the health of the economy, and in all likelihood the perception and fear of inflation is pushing stock prices irrationally lower.

Fear: “Stocks Might Go Down Even More”

Real talk for a moment…

This drawdown was long overdue. 

As the investor Michael Burry, of The Big Short fame, has pointed out…

In the last few years, there’s been more rampant, irresponsible speculation than the 1920s. 

Market valuations were higher than they were in the 1990s. 

And there’s greater risk of geopolitical and economic strife than the 1970s. 

But I want to zoom out a bit and show you something, especially when it comes to stocks…

This is the drawdown from its previous high for the S&P 500, Nasdaq, and Dow: 

That little recent dip toward the end?

It’s not even that bad. 

All the panic and stress and gnashing of teeth we’re seeing in the markets and on the news… It’s all over a relatively small drop. 

When I look at stocks this way, I can really only arrive at one conclusion…

The best time to buy stocks is when they go down in price. A lot. 

And the true genius investors who made the most money over the past several decades?

They bought all the way from top of the market to the bottom of each drawdown and simply held on.

This was true when we were seeing the biggest drops between 2000 and 2005, the biggest drops in 2007 and 2008, and the biggest drops in 2020. 

Here, I’ll prove this to you using data from the last 22 years…

That way we can include the tech bubble collapse, the Great Financial Crisis, and the Corona Crash.

Let’s say you bought exactly 1 share of $SPY (the ETF that tracks the S&P 500) or 1 share of $QQQ (the ETF that tracks the Nasdaq) every month that those indices were in a -10% correction. 

This is what your portfolios would look like:

If you only bought the S&P 500 only after it was down -10% or more each month, you would have seen gains of 228% over the last 22 years, or 324% with dividends reinvested. 

If you only bought the Nasdaq only after it was down -10% or more each month, you would have seen gains of 390% over the last 22 years, or 433% with dividends reinvested. 

And again… that’s just buying 1 share of each per month. Not a lot of money.

For comparison, if you had just bought and held and reinvested dividends from January 2000 to now, you would have seen 323% total returns from $SPY and 296% total returns from the $QQQ. 

So this “buy the market only after there’s a market correction” strategy?

It technically beats the market.

That’s one of the reasons why I blabber on about valuations and buying the dippier dip.

So really, things are either going to get better from here and most of the fears I’ve been talking about are unfounded…

Or things are going to get worse from here before they get better. 

Regardless of which one happens… 

The prescription I would give to people is the same:

• Buy, but don’t spend all your investment dollars all at once or all in one place. 

• Keep a sizable chunk of your investment portfolio in cash. 

• Buy quality companies rather than major indices for now, or buy indices that focus on dividends. 

• And if you know how to do this, sell put options on stocks you want to own regardless of what happens in the markets. 

If the market recovers from here?

You’ll be happy you bought, and you’ll be richer, too. 

If the market goes down from here and you keep buying more?

Your cost basis will continue to go down, and you’ll make a bunch of money from dividends and put option premiums before the market recovers. 

And if that happens, you’ll be happy you bought more. And richer, too.

This logic, I suspect, is one of the reasons why Warren Buffett has been buying stocks at a rapid pace in recent months…

Scooping up billions of dollars worth of shares of companies I own, like Apple and Chevron.  He’s also been buying a lot of financial services companies, the same type of companies I mentioned earlier that seem undervalued.

Michael Burry, too, the investor I mentioned above, has been bearish (that is, negative) about the market for years. 

He’s been calling this the mother of all bubbles. 

Yet even he’s still buying… And guess what he’s buying? 

Big, blue chip stocks like Apple and other big tech companies, like the ones mentioned in this interview.  

In the end, I have to reiterate what I said at the beginning of this report…

Even though the market just had one of its worst returning days in history on May 18, with even super-safe stocks declining in value…

I’m just not stressed about this downturn. 

All of these fears? 

They’re temporary. 

“Temporary” could mean that they’re problems for 6 months or 6 years. 

But it’s wrong to assume that markets will decline and these fears will persist forever. 

History tells us that the stock market is still, by far, one of the best vehicles for wealth creation in human history. 

And there’s nothing happening in the markets or the global economies right now that would seemingly shift that paradigm anytime soon.