As self-directed investors, we witnessed history last week. After a 90-day pause in tariffs was announced, the NASDAQ posted its 3rd biggest daily gain ever. However, over the course of the week, we saw some of the most significant daily moves in the markets in history.
In this week’s newsletter, I’ll go over my portfolio moves (because I finally made some) and then speak to the overall situation and what investors should be doing at this point in time.
These will likely be some of the most volatile markets we’ve witnessed since the financial crisis and even the dot-com bubble, so maintaining a level head right now is absolutely critical.
My portfolio moves this week
I finally deployed some capital this week. It wasn’t much, and I’m certainly not in any sort of rush to dump my cash position into a market that is moving by 6%+ a day. But prices were attractive enough that with a long-term time horizon, I wouldn’t be all that upset if the stocks continued to draw down over the next 6 months, year, or even longer.
I started a position in recent Bull List stock Uber.
My thoughts are well laid out in my recent Bull List report, which I’ll link to here, so I won’t discuss it much in this email. The position is about half of what I intend to put into the company, and I will likely fill out my position in the next few months.
I also added to my Amazon and Alphabet positions. Tariff fears and fears of a recession in the United States are dragging these companies down to the point where I feel valuations are attractive.
In fact, Amazon is trading at some of the lowest valuations in the last decade when we look to a price-to-operating cash flow (see the chart above).
The reason I’m valuing the company in this regard rather than free cash flow is the fact the company is deploying a lot of capital expenditure toward artificial intelligence expansion, which will ultimately drag down free cash flow in the short term.
Because the company is able to scale this back whenever it pleases, I’m more so concerned about the company’s operating cash flow. This is because free cash flow is simply operating cash flow minus capital expenditure. So, as long as the company can continue to grow operating cash flow, free cash flow should improve materially when capital expenditures are scaled back.
Finally, I made a small addition to my position in Cargojet. Again, this is a recent Bull List stock and I won’t speak about it much in this email, as my full thesis and updated commentary are available in my Bull List report, which I’ll link to here.
As we sit today, my portfolio is down 7% on the year.
When we compare this to major benchmark indexes, which is what everyone should be doing when we gauge returns, it is outperforming both the NASDAQ and the S&P 500. Considering my portfolio outperformed both indexes last year, the fact I am realizing less downside (thus far) is something I’m fairly happy with.
Thinking of trying to buy and sell in and out of these large swings? History says it will cost you, a lot
I’d like to highlight a chart someone shared in the Discord last week, showing how staying fully invested ultimately leads to the highest returns over the long run.
If one were to have panicked and sold their stocks during this volatility, missing that 12%+ runup in the markets, this would not only qualify for a “best” day, it was one of the best ever.
The added difficulty of this is that the best days in the market often come during the most turbulent times. During normal market conditions, we rarely get big movement in the indexes. However, when the markets are at their highest levels of uncertainty, they tend to swing the largest in price.
The unfortunate thing is that when the markets are at their most significant levels of uncertainty, it is during those times that retail investors often make the biggest mistakes.
As you can tell by the chart above, missing just the 10 best days on the market in a 15-year timespan would have cut your annual returns by more than half. Just 10 days in 15 years, and your returns are half of what they’d be if you just stayed invested. Crazy to think about.
The counter argument to this is valid, but also unachievable
A popular counter-argument to this study above regarding missing the best days is the fact that it doesn’t factor in people who have missed the worst days.
However, this argument is flawed for many reasons and generally sets investors up for failure.
The strategy of never missing a good day requires you to buy strong companies and hold them for the long term. In theory, you could make a single purchase today, never look at the account again, and you would have realized every single “best” day on the market until you decided to withdraw the money.
Missing the worst days, on the other hand, requires timing the market with exceptional accuracy. We have to buy in and out of stocks on days we feel will be bad and buy back on days we feel will be good.
Remember, I had mentioned above that the best days often go side by side with the worst. After all, the 12%~ day we witnessed last week was grouped largely around significant single-day losses.
This makes attempting to miss the bad days even more difficult, as you not only have to time those bad days perfectly but also re-enter the market to benefit from the large upswings that will often come immediately after.
Benefiting from the good days requires one action. Buy strong companies and hold them for the long term. Dodging the bad days requires you to get extremely lucky and more than likely just leads to long-term underperformance.
Why I’m mentioning this
It’s easy to maintain a relatively consistent investing strategy during bull markets. We buy at set intervals, and we reap the benefits.
However, when the bear market hits is when our mind starts to trick us. Our mind tends to focus too much on absolute returns (positive returns in any environment) rather than simply comparing our returns to a benchmark, like the TSX or the S&P 500.
Because of this, we get into the habit of trying to do too much. A few examples of this would be trying to sell out and buy in at lower lows or allocating more money than normal during periods when the markets dip. Another one I see a lot is investors who have perfectly reasonable stock portfolios that are, in some cases, actually doing better than the major indexes, wanting to swap from stocks to ETFs.
Obviously, I can’t speak on every individual investor’s portfolio here at Premium, but what I can say is that down markets are a perfectly healthy dynamic of the markets, and if we stick to our strategy, we will ultimately benefit more from the slumps than we would bull markets.
Why? I’ve added a simple chart below, which indicates the average retail investor mindset (red and blue), followed by the period in which stocks tend to provide the highest future returns (green).
This is because it allows us to accumulate higher quality companies at lower prices. As I mentioned previously, as stock prices get lower, our future expected returns get higher. However, when we start doing things outside of our normal strategies, we can significantly impact our long-term returns by simply doing too much.
In order to take the timing out of all of this, we simply purchase companies at regular intervals. That way, we don’t need to time anything and, thus, benefit from every market condition.
The week that was, and what we can expect moving forward
Whether you’ve been investing for 3 years or 3 decades, it is likely last week was one of the craziest you’ve ever witnessed.
We had a rumored 90-day pause in tariffs on Monday that caused one of the largest intraday moves on the NASDAQ in history. We then had the markets give a lot of it back once they figured out the tariff rumor was fabricated.
However, fast forward to Wednesday, and we have an official tariff pause, and the NASDAQ would go on to post its third largest single-day gain ever.
I won’t cover what exactly went on in this newsletter in terms of highly suspicious insider trading by the President. I’ll instead link to a YouTube video I made last week that will go over the details.
In this newsletter, I more so want to give some highlights on what we can expect moving forward, as I am sure the vast majority of investors here at Premium are concerned as to the direction the economy and where markets will head for the remainder of 2025.
Volatility isn’t going anywhere anytime soon
Because the tariff situation has such a large potential impact on the global economy, markets are going to fluctuate wildly based on any new press releases related to tariffs.
If we think about it, this is a reasonable reaction. The implementation of tariffs has a chance to materially impact the earnings of corporations as long as they’re in place. As you know by now, corporations are based on their forward earnings potential, not necessarily what they’ve earned in the past.
The market may be willing to pay 22-25x earnings for the S&P 500 when it’s growing at a high single-digit or double-digit pace. However, scale that growth back to low single-digits or even potentially an earnings decline, and valuation multiples are likely going to contract.
At this point in time, we’re sitting at 17.5x expected earnings. This is particularly bearish, at least over the last couple of decades, indicating that if this tariff situation is resolved quickly, there could be a good chance we see stocks jump quite a bit to the upside.
As you can tell by the chart above, the S&P 500 was trading at more than 25x earnings before tariffs became front and center.
You have to be comfortable with the idea that stocks could go much lower
As mentioned earlier, we can look to previous bear markets to conclude that they have been the best times to accumulate shares in strong companies. However, we need to be comfortable with the idea that there is a chance we won’t be immediately rewarded for our purchases. In fact, we might be punished, sometimes severely.
However, if we flip our thinking to the idea that we would welcome the opportunity to purchase the exact same companies we did last week at a 20% discount a couple of months from now, it makes sticking to a strategy of routine purchases at regular intervals relatively easy.
We start to welcome down markets.
If you are an investor who has experienced a multitude of bear markets, you likely adopt this strategy. Where it gets difficult is for those who haven’t necessarily faced a 20%, 30%, or even 40% decline in equity prices.
However, the sooner you learn, the sooner you can take advantage of the deals that could be presented to investors over the next while.
The difficulty with “deals” in this market
Over the last few weeks, many members have been asking me what “deals” I see at this point in time on the market. I believe my portfolio additions this week are a reflection of that to a certain degree, with the additions of Uber, Cargojet, Amazon, and Alphabet.
Outside of that, it is difficult to pinpoint what stocks are “cheap” right now, and I’ll explain why.
As I have mentioned numerous times before, the market values companies based on their forward earnings potential. With the President attempting to reform global trade completely, it is exceptionally difficult, some would say borderline impossible, to predict the expected earnings of publicly traded corporations at this time.
So, if I were to pinpoint what stocks I find cheap at this point, it would be nothing more than a speculative guess on what is going to happen moving forward. With some of the most brilliant economists in the world struggling to do so, I’m not even going to bother taking a guess.
Instead, I’m just going to reiterate for the umpteenth time that the best strategy taken here is to not necessarily fret about what companies are looking cheap but instead stick to a routine buying schedule of high-quality corporations.
In this regard, the Foundational Stocks and Bull Lists, ones I keep meticulously shortlisted and maintained, are your number one resource for stocks that I find attractive.
