⚠️ WARNING: Extreme Fear & Greed in the Stock Market

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Holy moly, the end of the year sell-off has been absolutely wild so far. The fear and
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greed index is now showing extreme fear and bearishness is at a record high for the year.
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As the broader market continues to panic sell, I've been getting tons of questions on every
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episode, as well as on Twitter, on Discord, and on Patreon. I'm really grateful that so
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many people are reaching out and asking questions instead of straight-up panicking and acting
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on emotion. That already makes you a better investor than most, including most fund managers,
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who are panic selling to pad their end-of-the-year performance numbers. Seriously, seeking answers
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is exactly what you should be doing in times like these. So, I spent the weekend reading
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through and organizing all of your questions, and I'll be answering them in this episode.
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I'll throw in every quick tip I can think of to give you every edge I feel I have from
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doing this full time. These kinds of Q&A sessions are usually exclusive to the hundreds of people
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supporting the channel as patrons on Patreon and channel members right here on YouTube,
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so if you're one of my supporters, thank you so much. Your awesome support makes this extra
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content possible and it means even more to me knowing your own portfolios are probably
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hurting right now. Since this one is getting posted publicly, I'll do another member-exclusive
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Q&A later in the month for you. And for everyone else, as always, I'm not a financial advisor
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and nothing I say here is ever financial advice. Your time is valuable, so let's get right
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into the questions.
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The first and most basic set of questions I've been getting is: what should I do right
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now?
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The answer is that you should learn how to read the market. Warren Buffett famously says
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that you should be fearful when others are greedy and greedy when others are fearful.
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How do you know when others are being greedy or fearful? Well, if you go check out CNN's
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Fear and Greed Index, you'll see that we're in extreme fear terrority. That article explains
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all of the factors they use to arrive at that number. For example, when people flee to safety,
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the demand for bonds goes up. As the S&P500 draws down toward its 125-day moving average,
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people become more worried it will crash. There are a lot of other indicators on this
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list that serve as a great introduction to understanding what the heck is actually going
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on at a high level. At the end of this list, CNN also shows you how the Fear and Greed
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index has changed over time. Today, it's very low, indicating extreme fear. Here's my extra
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tip for you: sentiment isn't the only thing that moves the market. Change in sentiment
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also moves it. People switched from extreme greed to extreme fear very quickly this time,
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which is why we're seeing such a large sell-off in the riskiest assets — the exact stocks
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and cryptocurrencies I focus on. Another place to track this is the AAII sentiment survey,
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which updates weekly and shows the ratio of people with a bullish, neutral, or bearish
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market outlook over the next 6 months. According to the latest survey, bearishness is at a
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yearly high and bullishness has been steadily trending down all month. I recommend you bookmark
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both of these websites, which I've linked in the description below. When I see the market
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getting to extreme fear territory, I start PREPARING to be greedy. I add cash to my brokerage
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accounts. I catch up on all of my highest conviction stocks. I organize my watch list.
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All the same things I've been saying for the last few weeks. That brings us right to the
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next question.
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How do I decide when to buy a high conviction growth stock versus putting more money into
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a cash-like position?
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So, the first thing I look at when I decide to put any money into the market is this fear
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to greed index. The next thing I check is market volatility, which is one of the components
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of this fear and greed index. The VIX, ticker symbol V I X, is a forward-looking measure
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of the volatility of the market, specifically the S&P 500. How can it be forward-looking?
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It looks at options on the S&P500 with near-term expiration dates. That means it's literally
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just another gauge of sentiment, but more near-term, and only from people with money
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on the line; the ones buying those options. When the VIX is below around 12ish, the market
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isn't expected to be too volatile in the near term. When the VIX is between 12 and 20, normal
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market volatility is expected. When the VIX is above 20 or so, people buying options think
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the market is going to be very volatile and prices might change very fast. Here's my extra
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tip for you here. In addition to the VIX, I track the VXN, ticker symbol V X N. This
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is the same exact thing except it's for the NASDAQ instead of the S&P500. The VXN is a
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better indicator for the stocks I focus on since the NASDAQ is filled with tech stocks
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specifically. It's also A LOT more volatile, which means I end up being much more conservative
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in when I decide to buy. Here's exactly how I use these indicators. When people are getting
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more fearful and volatility is high, I put my money in my cash-like positions or straight
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up leave it in cash. To me, cash-like positions are companies like Google and Facebook, and
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Microsoft. I have literally never ever regretted holding these companies over long periods
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of time. But when volatility is too high, even these stocks can come down; that's when
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I stick to cash. I'm literally at around 50% cash right now. When I see volatility coming
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down and the fear and greed index moving back toward greed, I tend to move more of my money
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into my high conviction growth stocks. Let me know in the comments below whether that
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makes sense to you or if I should clarify any of that. I'm excited to hear what you
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think. Alright, let's keep things moving with the next question.
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With everyone panic selling at once, prices are coming down very fast. Should I buy in
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all at once or slowly average in?
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In my personal, non-professional experience, I've never regretted slowly averaging in or
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out of a position and have almost always regretted buying or selling all at once. For example,
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I started my $100,000 portfolio project in October, so just 2 months ago. Imagine how
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silly I'd look if I spent all my money at once, only to have all my stocks drop by like
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40% just a few weeks later. Here's another example: a few of my friends just bought ARKK
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at $99 dollars a share. That's a great price, but ARKK is now $95. Whoops! So, instead of
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trying to catch a falling knife, I do exactly what I've said before: I get my cash ready
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and keep my watch list and portfolio organized. For each high conviction stock, I catch up
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on the latest earnings reports at a bare minimum, but usually, I'll listen to the whole earnings
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call and see what ARK Invest and my favorite YouTubers are saying about these stocks as
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well because they often catch something I missed myself. Then and only then do I look
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at the price charts for the stock specifically and decide if I want to buy and at what price.
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That brings me to the next question.
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Since many of the companies I look at are unprofitable, what metrics do I use to value
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a company?
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Long story short, the two metrics I care about most are the EV to EBITDA ratio, which I'll
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probably do an entire video on at some point, as well as the price to sales ratio, which
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I use instead of price to earnings since many of the companies I invest in… don't have
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earnings. Yet. I hope. Here's a good rule of thumb for price-to-sales for software-like
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companies. Take the forecasted 3-year compound annual growth rate of a company's revenue
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and cut it in half. That's the price-to-sales multiple you'd probably be willing to pay.
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Again, this ONLY applies to software-like growth companies like the ones my channel
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focuses on, so don't go using it everywhere. If that just sounded like a bunch of mumbo
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jumbo to you, no problem. Let's work through it, using Stone as an example since they literally
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just gave us this number in their most recent quarterly earnings report. The current 3-year
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compound annual growth rate of Stone's total revenue is 53%. Wow. Very high. Let's say
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I expect 40% over the next 3 years, even as they launch new products and services and
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acquire more customers across more verticles. 40 divided by 2 is 20 – that's the price to
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sales I'm pretty happy to pay. Stone is currently trading at a price to sales ratio of 11, far
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less than 20. It's trading at a lower price to sales ratio than Microsoft right now, which
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is one of my cash-like positions. When I made my first episode on Stone stock, it was trading
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at a price to sales ratio of, you guessed it, around 25, which is half of their 3-year
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revenue growth rate. That's what it means to be a data-driven investing channel. I honestly
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don't work too hard to find crazy stocks from every market sector like I used to. Instead,
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I've built one system of indicators and metrics that works for one pretty small set of stocks
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and I stick to that set, which are mostly software-oriented high-tech growth stocks.
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That leads us right into the next question.
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What stocks am I watching the most right now?
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I recently made an episode called Top 9 High Growth Stocks to Buy for 2022, which is my
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answer to this exact question. I'll leave it in the top right-hand corner of your screen
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right now and in the description below as well, along with all the other indicators
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and resources that I talked about earlier. The follow-up question I got the most on that
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episode was: Am I still confident in Tesla, Teladoc, Zoom, Pinterest, Ginkgo Bioworks,
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Palantir, Mercado Libre, Wejo, and every other company I didn't mention in that episode?
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The answer to that is yes, definitely, unless I specifically said otherwise. The point of
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that episode was to give investors different growth stocks at varying levels of risk, from
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relatively low-risk ETFs with 40 stocks all the way up to Stone, which is a risky stock
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in a risky market in a risky part of the world. For example, at the time of this recording,
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Teladoc is trading at a price to sales ratio of 8 and Mercado Libre is trading at under
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9. Those were the next 2 companies to make that list, but I wanted to keep that episode
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fairly short and sweet. I actually bought some shares of Zoom and Teladoc while making
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this episode, even though they weren't on that list. So, if you want to see the updated
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list of stocks I'm watching and get notified when I buy them, consider supporting the channel
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as an Insider tier patron on Patreon or channel member right here on YouTube. Otherwise, I'll
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do my best to keep you up to date with each episode, just like I've been doing, so there's
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no pressure either way; the portfolio project is just another way for me to try and add
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some value. Speaking of my portfolio project here's the next frequently asked question:
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Are you still buying ARK Invest's ETFs now that you're doing your own portfolio project?
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Yep! The reason I don't have ARK's funds in my portfolio is that that would defeat the
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point of showing you how I would manage my own positions, starting from scratch. I think
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ARKK, ARKG, and ARKW, which are ARK Invest's 3 biggest funds by assets under management,
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all got hit disproportionately hard relative to the rest of the market, because people
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think the stocks Cathie Wood buys are stay-at-home-stocks.
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In reality, she's found some of the most fundamentally misunderstood stocks on the market and is
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buying them from other people before they realize that they're not stay-at-home stocks,
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but go-online stocks. Stay competitive stocks. Solve problems globally stocks. When stocks
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are misunderstood, their prices swing a lot because the market doesn't agree on how to
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value the underlying company. These price movements are exactly how the stock market
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transfers money from the impatient to the patient and from swing traders to long-term
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investors. I gobbled up some ARKK and ARKG recently in my retirement accounts. These
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are the kinds of funds I like to buy low and then forget about for years at a time. Speaking
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of buying the ARK funds low, the next question is…
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With the possibility of inflation and another wave of the pandemic, do you see ARK Invest's
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prices going much lower?
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I've been saying this for a couple of weeks now but I think this really depends on what
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happens at the December 14th federal reserve meeting and what the exact plans for the tapering
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of quantitative easing is. It also depends on what's actually going on with the new strain
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of the pandemic. Is it a big deal? Is it nothing? How will the market digest new information
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on it? What I will say is that I think volatility will come down over time as patient investors
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and institutions scoop up great stocks at bargain-basement prices from impatient investors
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who are letting them go without really understanding what they're holding. The lower ARKK goes,
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the more attractive it should become, because we know Cathie Wood has a $420.69 price target
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on it 5 years from now. Yes, the math really works out that way, based on a recent interview
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where she said that she expects ARKK to roughly quadruple from its current price, which was
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$105 per share when she said that. 4 times 105 gets you to 420. Now that ARKK is 95 dollars
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a share, Cathie Wood should be expecting a 4.5x from here, or roughly
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a 35% compound annual growth rate over the next 5 years. Another question along these
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lines I get is about ARKG.
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Now that tech has gotten much cheaper in general, what do I think about ARKG specifically?
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So, I really like ARKG specifically because I know so little about healthcare in general
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and anything genomics specifically. The reason I buy ARKG is because the companies inside
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it have very little in common with the companies I tend to research and pick, which means their
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prices should move pretty differently in normal market times. This is also the problem with
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ARKG — when you buy something for a mathematical reason, like spreading out your risk, you
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don't really build a lot of conviction in it. Then, when more mature and better-understood
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technologies get cheaper, the opportunity cost of ARKG looks high because those technologies
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are still relatively young and now you can't remember why you're holding it. He's a thought
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exercise to illustrate what I mean. Imagine the price of ARKG and Tesla both fall by exactly
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50% right now. Which one are you going to buy? How come? Here's another version of the
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same exercise: every asset you watch just fell 80%. Whole market tanks. What're you
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buying and what're you selling? That's a good conviction test. The next question is why
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are you holding stocks you'd sell instead of buy when they're 80% off? That's the problem
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with ARKG, in my opinion. You want to hold it when you hear about it, but never more
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than you want to buy your highest conviction stocks when they go on sale. And speaking
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of conviction, here's the final question I get asked very often lately.
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Am I still convinced companies in ARK will deliver returns and have long-term success?
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Yes. Now more than ever as long as we're clear about what long-term means. To me, it means
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over the next 5 to 10 years. Not weeks, not months, years. I'm not here to day-trade.
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I'm here to build a machine that makes my money work for me instead of me having to
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work for my money. I believe ARK Invest's ideas about the future are helping me do that.
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If you tally up all the content on my channel, something like 85% of it talks about Cathie
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Wood, ARK Invest, something their analysts said, or some portion of their research. The
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more I read and listen to and absorb, the more convinced I am that they see something
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in the market that no one else does, which is that at least 5 huge technology platforms
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are coming together to transform our daily lives, regardless of what stock prices are
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doing this week or next. Tesla is down almost 20% from recent highs. Most of you wouldn't
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dream of selling it and some of you can't wait to buy even more. But Tesla isn't the
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only company we should have that same level of conviction in. So, what other companies
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will deliver these changes to our daily lives and the exponential long-term gains that come
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with that? That's what I'm trying to find out.
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So, stay long, stay strong, and thanks for watching. Until next time, this is Ticker
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Symbol YOU, my name is Alex, reminding you that the best investment you can make… is
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in you.