What To Do When The Market – Or Your Stock – Crashes?

What To Do When The Market – Or Your Stock – Crashes?

Sooooo…

Not sure if you noticed but the stock market dropped by more than 1,000 points twice last week – two of the market’s single day point drops ever – and a lot of people are freaking out.

Should you be?

No.

If you have disciplined investment processes you stick to, If you know what you’re doing, and if you own mostly good to great businesses, no you shouldn’t panic.

Or in many cases even do anything.

I answer the original question above in multiple different ways in the 13-minute video below. And I elaborate on these thoughts below the video.

In the video above, you learned why you should almost never panic in these kinds of situations.

Markets rise, markets fall, and in general, the market will continue to rise over time, barring a worldwide economic collapse. And if this happens, we will all have a lot more to worry about than our portfolios.

If you can ignore the market and continue doing disciplined research and you follow your processes for what worked for you in the past, you’ll do fine no matter what the market is doing.

That is, if you can keep your emotions in check.

This is the major potential problem every investor faces when a crash of any kind happens.

Why?

Because if you can’t keep your emotions in check, it doesn’t matter how much knowledge or skill you have as a value investor… If you can’t keep your emotions in check you will fail.

So what can you do about this?

Ignore the news, ignore the panic, stick to your processes, and learn how to control your emotions.

And keep in mind…

Even though most of the headlines said something like “Biggest One Day Crash In The Market’s History”, on a percentage basis these falls aren’t even in the top 20 biggest daily percentage losses. But the media doesn’t say that because it’s not as juicy of a headline.

Largest Percentage Daily Declines In US Stock Market History – The two ~4% Drops From Last Week Aren’t Even In The Top 20 Above

Am I saying you don’t need to be careful and reassess your portfolio to see if you should sell something or possibly to get more into cash? No.

I’ve said the market is overvalued for the last 5 years and it’s continued to go straight up. And it could continue to go straight up.

Or it could continue to crash…

No one knows when the next crash is going to happen.

If someone tries to tell you they know when the market or stock is going to crash, they’re full of shit and you need to run from them.

All I can tell you is the above…

If you continue to follow your disciplined processes and keep your emotions in check, long-term you’ll be fine.

In the short-term, your portfolio may get hammered in a crash, but if you’re concentrated on the long-term and are in mostly good to great businesses or cash you’ll be fine.

Get ready, learn as much as possible, continue to improve every day, and go with the flow like I talk about in the video above.

These are the best things you can do in these kinds of situations.

The WORST thing you can do is panic like the media, make emotional decisions, and watch the news on a minute by minute basis which will make your emotions go even crazier.

In the video above I mentioned many things I’ve done to get my mind out of the market. Things like learning and improving myself, my businesses, and my team.

What are some things you do to get rid of your emotions when the stock market or a stock you own crashes?

I’d love to hear some of them in the comments below.

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Value Investing In Your Car Episode 6 – The Power Of Anchoring Bias

Value Investing In Your Car Episode 6 – The Power Of Anchoring Bias

In Episode 1 of Value Investing In Your Car, I answered the question Does Value Investing Work Anywhere In The World?

In Episode 2I answered the question When Does Value Investing Work Best?

In Episode 3, I told you about the best book I read in 2017, and recommended some other great books that I read in 2017.

And in Episode 4, I talked about how my family inspires me to become great and how having someone or something inspire you can change your entire life.

In Episode 5, I talked about how I may have found a new investment for the first time in almost 3 years.

And today in Episode 6, we’re talking about Anchoring Bias, its immense power, and how this relates to value investing.

So what is anchoring bias?

Anchoring Bias – A Major Cognitive Bias And Mental Model

Anchoring bias is an incredibly powerful cognitive bias.

Above is the generally known definition for anchoring bias… I would change one minor thing about the above – this change is in bold.

I would change it to this – “Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered or the piece of information that best fits what they want.  Even if it’s not reality.

Why?

In the 10 minute video below, I describe a real-world example about how I struggle with anchoring bias and gas. What I do about this bias, and how understanding the mental model of anchoring bias and what to do about it can help you become a better value investor.

I talk about a real – world example in the video above but a value investment example would be…

Let’s say you found a small cap investment that is undervalued and that it’s worth $25 per share, so you decide to buy its shares at $20 while you can.

Instead of going up though, the stock price drops to $10 a share – or a 50% drop – 6 months later based on some very short – term problems for the company.

After reanalyzing the company to see if you made a mistake, you find out that these problems haven’t changed the economics or profitability of the company at all. And have done nothing to harm the long – term health of the company’s operations or balance sheet.

Should you buy more, do nothing, or sell your stock?

If you let anchoring bias get in the way – and your emotions take over – you may make the decision to sell because of these short – term problems.

Even if you should hold on – or even maybe buy more shares – since the company is the same or better off now, than it was when you first bought.

Knowing what anchoring bias is and how to potentially deal with these emotions and cognitive biases are part of the battle when you come across this example yourself after you buy an investment.

Some of the other stuff talked about in this video…

  • Why understanding Anchoring Bias is so important for value investing
  • Why understanding other cognitive biases and mental models are important to become a great value investor as well
  • How I still struggle with anchoring bias every time I gas up my truck
  • What I do about this
  • How I fight against this and other biases
  • And more

I’d love to hear your thoughts on anchoring bias in the comments below.

Here’s another post on Medium about anchoring bias if you want to learn more.

P.S. If you’d like all future posts like this, make sure to sign up to our mailing list for FREE here. You’ll also gain access to free gifts that will help you become a better value investor as well just for signing up.

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Is Float Ever Bad? On Float Part 6

Is Float Ever Bad? On Float Part 6

The goal of this blog is to help us all improve as investors and thinkers so we’re a little wiser every day.  The hope being that our knowledge will compound over time so we’ll have huge advantages over other investors in the future.

The aim of today’s post is to continue this process by talking about a topic few investors know about.  And even fewer understand.

Most people overlook float when evaluating companies because they either don’t know what it is.  Don’t know the power it can have within a business.  Or don’t know how to evaluate it.

This won’t be an issue here.

Press On Research subscribers already know this as I talk a lot about float in many of the issues I’ve written.  But I want to begin talking about it more here because float is one of the most powerful and least understood concepts of business analysis.

Today’s post is a continuation of the earlier posts:

Today we’re going to answer the question “Is Float Ever Bad?

Is Float Ever Bad?

I’m a guy who likes to live by the above quote.  If I can make things simpler I always do.  Not only does this make things easier to understand but it also can save a ton of time.

When analyzing investments and dealing with complex topics like investment float this isn’t always possible.

Understanding the good things about investment float is definitely one of those things you can make only so simple.  The concept is simple to understand but the there are a ton of different nuances to understand which leads to complexity.  You can likely tell since it’s taken me 51 pages thus far in the five earlier posts to explain the good things about investment float.

Luckily the answer to the titled question is a simple one.  And also involves simple and easy to understand concepts as well.

Yes, certain investment float is bad.  And no, not all float is equal.

The heuristic or mental model I use when evaluating float is that if the company isn’t profitable – or near profitability – its float is useless.  And can even be a negative burden for a company.

Why?

Remember, float are liabilities that can become positive leverage if used well by management and the company is profitable.  But always remember leverage can go both ways as well.

If a company isn’t profitable and hasn’t produced profits in several years float turns into negative leverage.  This is because in the long run float are liabilities the company will have to pay at some point.

The longer a company goes without earning profits the longer it will take a company to pay its liabilities because it’s not earning enough money.  This also makes it harder to fund operations and grow in a healthy way without taking on a ton of debt or even more liabilities.

Let’s go through a quick example to show this.

Let’s say we have two insurance companies.  Company A has an average combined ratio of 90% over the last five years and Company B has an average combined ratio of 110% over the last five years.

Not only does this mean Company A’s profits are 20 percentage points better on average than Company B.  But it also likely means that Company B has continued racking up liabilities it can’t afford to pay when due or when a catastrophe strikes.

This is because Company B hasn’t earned a profit on average over the last five years.  And of course all else remaining equal a company earning 20 percentage points better profit’s on average is the higher quality company.

The same general rule goes for non insurance companies as well.  If they aren’t, haven’t been, and show no signs of becoming profitable float should be viewed as negative leverage for a company.

I use the following rules when evaluating all companies float…

  • To view float as a giant positive for any company I like to see consistent profitability in the last five years.  And/or seven of the last 10 years.
  • If a company has off and on profitability I view float as neutral.
  • And if the company is consistently unprofitable I view float as a huge negative for the company.

I consider profitability of operating margin, ROIC, ROCE, and FCF/Sales.  The company doesn’t have to produce huge excess profitability in each category.  I look for consistency and trend of profits more than anything when evaluating float.

This idea is a lot simpler to understand than the concept of what float is and makes it potentially great for companies and investors.

One last thing to remember when evaluating float is that whether the company has positive or negative acting float doesn’t matter if the company doesn’t allocate capital well.  And the management doesn’t know what float is or how to use it.

To evaluate these potentials see the previous five posts on this topic.

Summary

If I’ve explained everything well enough in the series so far we should understand –

  • What float is.
  • Why it’s important.
  • How companies can use float as positive leverage.
  • How Buffett got so rich using float.
  • How to find float on a balance sheet.
  • How to evaluate float.
  • How float affects a company and its margins.
  • Maybe the most important thing why float affects a company and its margins.
  • How float affects a company’s value.
  • And answered the question is float ever bad?

In the next and final seventh chapter of this series I’ll share the best resources I’ve learned from about float with you.

Knowing what we know now we should have a gigantic advantage over other investors who either don’t know about float.  Or aren’t willing to put in the time to learn what it is and what it can do for a company and investment.

If you have any questions, concerns, or comments on float up to this point please let me know in the comments section below.

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*Repost* Searching For Case Studies – Turning $2 Million Into $2 Trillion

*Repost* Searching For Case Studies – Turning $2 Million Into $2 Trillion

I’m moving my family across country and am unable to post anything new until settling down in the Tampa area.

For more information on how this will affect anything go here.

I hope you enjoy these older posts in the meantime.  And please feel free to contact me.  I’ll get back to you when I can.

To subscribe to the Value Investing Journey newsletter go here.

To subscribe to the Press On Research exclusive newsletter go here.

Thanks so much.

Jason

I’ve been sick this past week which is why I haven’t posted anything.

But as I’ve recovered I’ve started to look for case study candidates again and have kept hitting walls.  Every company I look at is either crap.  Way overvalued.  Or is something small I may analyze for Press On Research.

Learning happens when we’re challenged.  Not when things are easy.  And I’m having a hard time finding something to evaluate that’s challenging.  So I need your help again.

If you have any companies you want me to research and do case studies about please let me know.  Because the more we’re all involved the more we’ll learn.

Analyzing companies over and over is the best way to learn how to evaluate them for investment.  The more we do here the faster we’ll all learn.  So please let me know of any companies in the comments below.

Until then I’m posting an excellent case study done by Charlie Munger.  It’s a brilliant thought experiment on Turning $2 Million into $2 Trillion via Mungerisms.

Let me know your thoughts about this in the comments below as well.

*Repost* Car Wash Psychology, Mental Models, And The Power Of Habit

*Repost* Car Wash Psychology, Mental Models, And The Power Of Habit

Getting back from a 33 hour drive across the country left me exhausted.  But I had one thing left to do before resting.

I had to wash my truck…

From the salty and sticky humidity of South Florida.  Through the rain, snow, and ice of Tennessee and Kentucky.  Then the dry wind of Iowa and South Dakota.  And all the bugs and dirt between.  My truck was a disaster after a 33 hour drive through nine states.

Why did I have to wash my truck when I got home?

Because several weeks before this I’d read a psychology and marketing case study about car washes. And I wanted to see if it was true or not.

Exhausted from the three-day drive across country. I waited at the car wash and marveled at the surprising beautiful March day in Western South Dakota.

Instead of negative wind chills. High wind. And blizzards that are common at that time of year here. I came home to a cloudless sunny sky. And 70 degree temperatures.

It was a perfect day to wash my truck. But after getting it into the car wash bay I worried that I’d made a mistake.

Why?

Because of marketing, psychology, and habit.

But we will get back to this later…

Building Worldly Wisdom and A Latticework of Mental Models

Why am I talking about marketing, psychology, and habit on a value investing blog?

As a contrarian deep value investor, I’m always looking for ways to gain legal advantages over other investors.  Most of the time this involves working hard.  But sometimes it also requires the ability to think well.

To think better I study a lot of topics.  And follow Charlie Munger’s teachings about gaining Worldly Wisdom.  And building a latticework of mental models.

One of the areas I’ve spent a huge amount of time studying is human psychology. Trying to figure out  why we do what we do.  And what makes us tick to become a better investor.

How To Get People To Buy Things

I know a lot about how to analyze businesses for potential investment.  So when I got hired by the investment newsletter I was not only excited to write an investment newsletter.  But I also looked forward to learning about the investment newsletter business.  And everything associated with it including psychology and marketing.

If I wasn’t at work.  At the beach.  Sleeping.  Or working at home.  I was reading anything I could about marketing and how to improve my writing.  But for this post I want to talk about some of the things I learned about marketing…

Marketers Rule The World

Did you know that shampoo doesn’t have to foam to clean your hair?  What was Listerine used for before marketers got involved?  Did you know that Febreze was a failure until marketers used psychology and habit to market it?  And does your car get cleaner when you upgrade to the “Super Wash.”

I will answer these questions below.  And also answer how marketers use psychology to get us to develop habits.  And buy products.

Shampoo

Below is a marketing case study from Procter & Gamble brand Herbal Essences.  Which before marketers revamped it was floundering.  Emphasis is mine.

I also changed some of the wording to shorten things.  For the full transcript go to this link.

When Procter & Gamble acquired hair-care company Clairol in 2001, it inherited a floundering shampoo brand. By 2004, Herbal Essences was in a “long-term decline,” reports Chairman and CEO A.G. Lafley.

Marketed to all women the line had gone stale, with little distinction from the many competitors it shared on the drugstore shelf.

By 2006, Lafley and P&G’s beauty business chief, Susan Arnold, knew something had to be done with the tired brand.

To find the right new, smaller target market for the brand, Arnold and her team turned to marketers.

There, the team came up with a new target audience for the brand—Generation Y. “In the case of Gen Y, there really wasn’t another hair-care brand that was really meeting their needs,” says Lafley. “The question was: ‘Can Herbal do it?'”

Arnold’s team bet yes. They redesigned the packaging of the product to “fit” this more tailored market: The shampoo and conditioner bottles are curved so that they literally fit together on the shelf. The nesting shape not only helped Herbal Essences stand out from others on the shelf but also encouraged more young women to buy both products, driving up conditioner sales.

To appeal to Millennials, the team also updated the language on the packaging. The ho-hum “dandruff” reference gave way to “no flaking away.” Names for different hair styles were changed to more youthful phrases such as “totally twisted” or “drama clean.” “We totally reframed the proposition,” says Lafley.

P&G made Herbal Essences more relaxed and more quirky, all in the language of young women.

Marketers used psychology and habit to turn this floundering line into a billion dollar plus brand.  And Herbal Essences parent Clariol now controls an estimated 39% of the entire hair care market.

For further information on the revival of Herbal Essences look at this infographic.

Oh and to answer the above question…  The chemical sodium lauryl sulfate was added to shampoo to foam and bubble.  It’s not necessary in shampoo.  And it doesn’t affect how well the shampoo cleans your hair.

Shampoo makers added the foaming agent for marketing and psychology purposes. To help sell product and build habit.

I will explain this more later.

Oh and the foaming ingredient is also what irritates your skin and eyes.  So thank marketers for your dry skin.  And eye pain when washing your hair.

Listerine The Antiseptic

Did you know Listerine was a deodorant and after shave.  A brand of cigarettes.  And used to treat gonorrhea and cuts before becoming a mouth wash?

Below is one of the ads used to promote Listerine after it launched..

But by focusing on cuts, scratches, and gonorrhea Listerine was a failure.

Then marketers got involved.  Made bad breath a terrible thing.  And launched a $317 million brand as of 2013

Until that time, bad breath was not conventionally considered such a catastrophe. But Listerine changed that. As the advertising scholar James B. Twitchell writes, “Listerine did not make mouthwash as much as it made halitosis.” In just seven years, the company’s revenues rose from $115,000 to more than $8 million. From Wikipedia

Instead of saying Listerine will help keep your cuts from becoming infected.  Marketers found out that Listerine also helped get rid of bad breath.  And they used the second ad above to illustrate the point.

Listerine marketers made having bad breath a terrible thing.  Up to that point this wasn’t awful.

In the second ad above marketers said that if you have bad breath you won’t get married.  But if you use Listerine on a regular basis – making it a habit – not only will you get rid of bad breath.  But it will also help you get the guy or girl of your dreams.

So marketers used psychology and habit to help get rid of smelly hair and breath.  What other smells have marketers helped us get rid of?

Febreze The Failure

The below quoted area is from Wikipedia.  Emphasis is mine.

The product, initially marketed as a way to get rid of unpleasant smells, sold poorly until P&G realised that people become accustomed to smells in their own homes, and stop noticing them even when they are overpowering (like the smell of several cats in a single household).

The marketing then switched to linking it to pleasant smells and good cleaning habits instead, which resulted in a massive increase in sales.

Only after the product became well established in the marketplace did the marketing go back to emphasising odor elimination properties as well.

They have advertised it so that people use it for cleaning, and for designing the house air.

Febreze was a failure when it launched.  Even after Procter and Gamble – one of the best product launch companies in the world – spent millions of dollars to promote it.

Febreze didn’t become the huge success it is until P&G figured out how to market it to us.  And they’ve done a great job… Febreze is now a billion dollar plus brand.

For more information on how marketers used psychology and habit to change Febreze from a flop to a billion dollar brand go here.

Now let’s get back to the story at the beginning of this post…

Car Wash Psychology

So why was I so eager to get my car washed when I got home from my 33 hour cross-country trip.  And how did marketers make me think I’d made a mistake when selecting my car wash?

A few weeks before my trip I was reading about marketing and psychology to improve my knowledge in those areas.  And came across a case study about the car wash industry.

The case study detailed how car washes get us to upgrade to the higher end washes so they make more money.  But the thing that struck me like a brick was that the different color bubbles in the car wash don’t do anything to clean or wax your car.

The colored bubbles only make us think they wash better

The car washes add colors to the bubbles of the higher end washes to make us think they are doing something.  It’s a clever way marketers – in this case the car wash – affects our psychology to get us to upgrade.  But it also builds habits as well.  And habits are what marketers use to get us to buy stuff.

The Power Of Habit

The Power of Habit is an amazing book.  And I agree with Mr. Pink above.

It’s changed the way I think about how I parent.  My investment processes.  Psychology.  And how I do everything in my life.  In short I cannot recommend that you read this book enough.

Below is author Charles Duhigg explaining in a three-minute video how we develop habits.  And how to break bad habits.

The Combined Power of Psychology, Marketing, and Habit

So now let’s get back to why I worried at the beginning of this story.

After my trip I decided to do a little experiment to see if the car wash case study I read was full of crap.  Or if it was right and car washes were using psychology and habit to get us to upgrade to stuff we didn’t need.

When I got to the car wash I picked the basic wash without the colored bubbles to see if the case study was right.  But when I got into the wash I started to worry that I’d wasted my money.

Ever since I was little everyone always told me to upgrade to the “better” car washes.  If I didn’t my car wouldn’t get clean and I would have to wash my car again.

So even though I knew that the upgraded car washes weren’t necessary after reading the case study.  And doing further research to confirm the findings.  As I sat in the car wash bay with the water and soap running over my truck.  I began to worry that I’d wasted my money when I didn’t see the colored bubbles washing my truck.

Marketers have incredible power when they combine psychology and habit when selling stuff…

Even though I knew the colored bubbles were a marketing tactic.  I still worried that I was wasting money.

So the longer I sat there the more anxious I got to see if the basic wash worked…

After I got through the air dryer I got out of my truck to see if I wasted my money or not.

With the water still beading off my red Dodge Ram 1500 I saw that the basic wash got all the salt, dirt, bugs, snow and rain water spots off my truck.  And my truck was as clean and shiny as the day I bought it.

Seeing this brought a smile to my face knowing that I learned some powerful lessons about marketing, psychology, and habit.  Built my latticework of mental models and worldly wisdom up.  And got a bit closer to achieving my goals as an investor, teacher, and entrepreneur.

Still smiling knowing I learned something valuable, I drove my clean truck home and slept for the next 16 hours.

And I’ve shared this story in the hopes that it will help you in some way too.

What quirky mental models, worldly wisdom, or aspects of psychology have you learned that blew your mind when you first saw them?

Please share below in the comments.

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Want more information on how marketers use psychology to get us to buy stuff…  Go here.  It looks like an entire college level course about marketing and consumer market psychology.

And if you want to read more about Mr. Munger’s thoughts on psychology and how to think better, read his speech Psychology of Human Misjudgment.

Or watch the 76 minute talk below from YouTube.

This is the best thing I’ve ever read about psychology.  And how to become a better thinker.

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