#12 - Is the market really crashing?

Last time we looked at the rather crazy markets and what you can do as a new investor. We also took a look at the prices of companies and how you should think about them.

We’re now in crash territory in some markets

I talked about it this week on LinkedIn, and I wanted to further explain it here: Some of the markets are crashing.

The Nasdaq100 index, AKA the American tech index, is down 25% from it’s recent top in December-2021.

25% is usually my definition of a market crash, and it only happened 6 times in the last 35 years (with this one included).

Once again, I can’t say if we will go further down from here, but that’s not really important either. What’s important is that we now have a stock market, where major parts of is starting to crash. Here’s a list of indexes and their negative returns:

• Largest Hong Kong index: Hang Seng (-40%)

• Largest Chinese index: SZSE (-25%)

• Largest Danish index: OMXC25 (-22%)

• Largest American index: S&P 500 (-16%)

• Largest Indian index: Sensex (-15%)

• Largest German index: DAX30 (-14%)

• Largest Japanese index: Nikkei (-14%)

The Chinese markets have been down for a while, so that’s no news. It’s still not without worry though, as they are showing signs of slower growth, and still have their major cities in almost full lockdown.

The American and European markets are really suffering as well, mainly controlled by the American market. It is the “big brother”, and the one to follow closest attention too. Specifically the S&P 500.

These “spooks” or “shocks” in the market are usually a bad sign, and it might ripple further into the other markets as well.

So you could say that the Nasdaq100 will show the way, and take the rest of the markets with it. You are smart though, so you’re not going to react to this.

If you are invested you stay calm and ride out the storm. If you want to invest, this is a great time to start getting in.

No one knows whether we are going down further, or if this is the bottom. There’s no reason to guess or time it. If we go down further, so be it.

If we look at the S&P 500, we’re still “only” 16% down since the top, which is still rare but not unheard of:

If we look at the long-term holistic view, we’re still okay and actually in the top of this 80-year long channel.

Remember this picture.

And know that no matter what happens, the markets WILL NEVER CRASH COMPLETELY.

They always come back to their mean, sooner or later.

Companies that makes money for us - Part 2

Last time we took a look at the mindset around the stock price. This time we’re going to look at how to calculate the intrinsic value of a stock. In other words, what is it really worth? There are many such calculations, and you will find new ones depending on who you ask, and how they choose to analyze a stock. The one today is a simple one that we can use to check the temperature of the stock, if you will. I like to use it that way, to know if the stock is waaay off or actually interesting to look further into. It goes like this: Intrinsic value = Earnings per share (EPS) x (1 + r) x P/E ratio. That’s all for today. See you next time. Ha ha right? Okay, sorry… EPS is what we looked at in this newsletter, and it’s the latest number, so in our case that would be for 2021. R is the expected earnings growth rate. That means we have to look at how much the EPS grew over the last 10 years, and then put our expected growth forward into the future. The P/E ratio is the share price divided by the EPS. Okay… We need examples I feel like. Let’s look at Microsoft and Netflix. And where do we go? Macrotrends.net, friend! Microsoft’s EPS for 2021 is $8.05 Netflix’s EPS for 2021 $11.24 For the “r” value we look at their growth in EPS over the last 10 years, put it in excel and do a simple calculation to get an average growth rate of: Microsoft: 12% per year Netflix: 34% per year It’s good to be a bit more conservative, so we can do 10% and 30% respectively. For the P/E, we had at the end of 2021: Microsoft: 35.74 Netflix: 53.60 Again we will be a bit conservative and say 30 and 45 respectively. The intrinsic values: Microsoft: 8.05 x (1 + 0.10) x 30 = $265 Current price of Microsoft is: $261 Netflix: 11.24 x (1 + 0.30) x 45 = $657 Current price of Netflix is: $187 So? Microsoft’s current price is at a fairly okay level considering this conservative intrinsic value. What this means is that the stock price actually reflects the real price of Microsoft at the moment. It would be interesting to take a look at Microsoft from here. Netflix is FAR BELOW their intrinsic value, indicating that they are very cheap at the moment. This is good for us. Do mind that they came from a share price of $600 just 5 months ago. That should ring a bell and have you go check their latest quarterly reports. So that was a bit about the intrinsic value of a stock. If you can find a good, solid company, with great finances and a price that is below the intrinsic value, you might be sitting on a gold mine. Next time I will look closely at a stock and analyze it using the 5 methods we have been going through the last 6-7 newsletters. If you have any wishes for a stock I should analyze, then answer this email and it might be yours that I pick next time.

Do you want to learn more?

Then book a free 15 min call with me to learn how I can help you, and ask all the stock market questions you have: