How the Stock Market Really Works

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Transcript

Hi, my name is Bob Brooks, today I want to talk to you about something I think that you really need to know. And it's how the stock market really works. And what most people in the business don't even know I've had this conversation with other advisors. And they've been surprised as to what I've talked about. And this is something so important for you to know. Because this would influence I think, can change the way that you look at investing.

I've done this in a lot of different seminars, and I've had people come up to me and say, you know, I really struggle with understanding how stock market the stock market works and what it means and all that. But I tell you, what you talked about was very eye opening and helped me to understand a lot better. And I'm hoping that that same experience is what you have, and so that you can look at this a little bit more realistically. Now. Let me say what I'm not going to do. I'm not going to talk in financial ease.

This is something that people in my business have such a bad habit of doing. It's the language of investment spoken in such a way That no one understands you're glazing over, you're saying this is just I just don't get it. I'm not going to do that we're going to look at pictures, I'm going to make this very relatable. I love to talk about this. And I remember one time telling my wife, I tell them, Sherry, that I was going to, you know, back to go do a seminar, and she looked at me, she goes, Oh, you're not going to bore those poor people with beer, bear and bull markets. And I said, No, I'm going to talk about and explain it.

And so I'm going to make sure that you understand, I do get the fact that not everybody relates to this. But at the same time, we all still have that burden of growing money and investing. So it's a matter of doing it the right way. So no financial ease. Now, I'll say this, there is one part at the very towards the very end. I'm going to talk a little bit about some numbers and whatnot.

And it's just for those who might be interested, but I want to make sure that you get the main point of how all this really works. Now let's go through a few definitions to make sure we're on the same page. What's a bull market what's a bear market a bull market is a market that goes up over time. Love the bull markets, people make money. In the bull markets, then there's the bear markets that go down over time. Imagine the value of your investment account going down.

That's where people lose money. And what the what the industry tip typically focuses on more so than anything. I'll tell you why in a minute, is the bull markets because it's easy to make money in a bull market? What they don't focus on? Is the bear markets because they don't have an answer for it. Now, if you've been watching any of my teaching videos, you know about Plan A and plan B, Plan A is when the market goes up.

Plan B is when the market goes down. And to be successful long term as an investor, you got to have a plan a and a plan B. It's very simple. And what the industry wants you to focus on though, is the long term we're going to show this in a minute is how the market goes up over the long term and that is going to make everything okay. Well, you're going to be surprised as I show you that that's not really the case. So we'll talk about that.

The other thing that I would want to mention is when I say the stock market What do I mean in immediate on the radio, we tend to talk about online hosts radio show tend to talk about the stock market as if there is One stock market, there are several stock markets. There's the Dow Jones Industrial Average. There's the s&p 500. There's the NASDAQ. And there's a host of other stock markets. Today, we're going to focus on the Dow Jones Industrial Average.

And the thing about it is that I think that you we kind of, we lump all these two stock markets in together because they typically all move in the same direction, some more than others. But this is what the industry shows you, they show you over a long period of time in this chart, by the way, the way to read this chart, it's just pretend this is your investment dollars at work, your retirement dollars, it's going up, it's going down, it's going up and they'll say this is 1932 all the way up to 2016. And what they'll say is that over time, the market goes up, so you have nothing to worry about. Yeah, we go through some bad times. But over time the market goes up. I'll never forget back during the financial crisis, the the financial services industry was in overdrive trying to make sure that everybody felt okay while they were losing money.

So there was a Charles Schwab commercial and you know, Charles Schwab owns a big brokerage company where hundreds of thousands of people have accounts there. And they, they had their investments there. And they were showing a meeting, where Charles Schwab was going to attend this meeting and answer investors concerned during this financial meltdown. And you could cut the tension with a knife and he had all these people in there in a kind of a town hall setting. And they were in a very tense incomes, Charles Schwab. And I'm thinking myself, this is going to be good.

This is Charles Schwab. He's going to say something really, really helpful to these investors. And so the questions start flying You know, this is Mr. Schwab. What should I be selling my investments? Should I be getting out of the market? Should I be doing this?

Should I be changing strategies that the questions were just coming from right and from left, all sudden, it gets very quiet, the camera pans in and you're thinking here it comes. And he says, I can't make this up. He says the market goes up. The market goes down. But the market goes up and I'm thinking to myself, are you serious? Is that's the best you got for these people who are really concerned.

So we're going to show I'm going to show you what really happens because what what you need to look at is not these big long term graphs, because that doesn't fit reality. What you need to look at is what happens during time periods. So go along with me on this, and I think you'll you'll really benefit the first period 1900 to 1922. Look at this. This is the value of your account all over the place. It starts here.

It ends there not I feel like a meteorologist. It doesn't really move. It doesn't go anywhere. And that that folks has 22 years. Does that look like a great time to be invested in stocks? Does that look like a plan B environment, and then we go to the next next area of time?

It starts right here. This is actually 1922 right here. You see the market goes up all the way up to 1929. Seven years, one of the greatest most powerful bull markets were millionaires were made that was the roaring 20s. So you've probably read about that time period where people were betting everything on the stock market and making tons and tons of money. But that had an ended date 1929 to 1942.

Look at this drop 1929 down to 1932. That was an 86% drop. Can you imagine losing 86% of your retirement, that's what happened during that time period, then it kind of meandered around basically you started up here, and then all the way down to 1942 ended right there. Now here's what the the financial services industry why they discount this. They'll say, Well, that was a different error. That can't happen.

Again, we have things in place to prevent that from happening. When I want to submit to you is this. The reason that this happens? The reason that stock markets can repeat things from the past is because this is all about human emotion. Buying and selling is driven by human emotion. And here's the reality of it is the greed is great.

Fear is fear. Anxiety is anxiety powers power controls control. It's the same as today as a 20s. As in biblical days, it doesn't change. So as long as humans are driving the market, yes, this is a possibility. Now granted, not a high possibility.

But you have to know that in the back of your mind, that is a possibility. And you need to prepare for things like that that could happen. It's just like living in Houston. Now, Houston is not immune to hurricanes. But it's a low probability that a category five hurricane is going to hit Houston. And it is a probability.

So you can't live in Houston and just say, oh, that will never happen. You got to prepare for the possibility of it happening and be aware of it. So we go forward here. 1942 to 1966 look at that stock market goes way up, big bull market. There's some bumps along the way, but for the most part, it goes up and this really fits that whole idea of buying, investing, buying, excuse me, buying investments and holding them back. And hold investing in did the investors to great over that time period, then you switch to another another time period Look at this mess 1966 to 1982 it was all over the board big drops in value, and investors lost money.

And that Think about that for a second. That's a 16 year period. I asked the question again, is this a good time to be invested in the stock market would this be better, better served with a plan B type attitude and mentality. The market didn't do very well at all during that that time period, then you transition to this chart 1982 to 2000, an enormous, enormous bull market where so many people made a lot of money. Now here's the interesting thing about this dynamic 1982 to 2000, I would submit to you was where the vast majority of people who are investing today we're kind of born as investors it's like being born with a A silver spoon in your mouth. I mean, you can't ask for a better market trend than that over 18 years of the market going up, and people making money.

And so this is really all of today's Vester knows and the mutual fund industry kind of plays off of that. Because the mutual fund industry looks at that from the standpoint of this is the way it's always been, the market always goes up. But you know, different now that it did fluctuate, so 1982 to 2000. And then you get this big bear market over 50% loss, the market goes up in a bull market, big bear market, the financial crisis down, and then you're up here now to 2016. And let's talk about why this happens. Why does the market go through a certain period of years where it's rough to be an investor to a certain period of years, and it's great to be an investor too, it's rough, Said another way.

Why does the market go from a boom long term bull market cycle to a long term bear market cycle and keep repeating itself? Why is it done it all the way? To the beginning of the stock market, it's simply This is that in long term bull markets, things get out of balance, then you go through long term bear markets to bring things back into balance, then once things are imbalanced, and things start to get out of balance, again, it's the rhythm of the market. I came across a great book back in 2002, that really changed my perspective of how I look at stocks at the stock market. And it's written by, by best Michael Alexander called stock cycles, and his body of work. This is the same thing.

This is where I'm getting total financial ease. This is the same thing just in number form. You saw it in picture form, which I think it's a little bit easier to relate to, but it goes back and forth. So what I want to point out is simply this 1966 remember 66 to 82 bad time to be in the market. Then it transitioned over to this enormous bull market cycle of 82 to 2000. Then we're at 2000.

Now, are we on this side, or are we on that side? And it's a very important distinction to be made because it could affect how you go about investing. Now, what's interesting about this is that it could be 2017 2018 the materials still very relatable, but I'm kind of making a forecast where I think we are. And we'll see whether it's right or wrong. I still think we're over here. And having said that, if we are still over here, that means in 2016, where we are right now we are about we are heading into and the market has really started off very poorly this year.

We are heading back into a bear market cycle that would complete this cycle, setting us up for a couple of years to be over here. We'll see what happens. But there's a lot of a lot of indicators that would that would suggest that's going on now. What is wrong with buy and hold investing? This is at the cornerstone of pop culture, finance, and what the mutual fund industry wants you to believe they want you to buy investments in stocks and hold it, even if you're losing 50% just hold it because you're a long term investor. To me.

It doesn't matter Makes sense. It's never made sense. Why would you buy and hold through a bear market? Why would the markets losing 50%? Why would you stick around for that? And and I know that so many people that that are big believers in this don't, or do not agree with me on this, which is fine.

But it's it's a flawed concept, I would say I would say it this way, buy and hold, investing works some of the time, and not all the time. Whereas mutual fund industry wants you to believe and there's a reason for this. They want you to believe that it works all the time. The problem with that is that for the mutual fund industry, they want you to stay invested, because that's how they make money. They don't want you pulling money out. They don't want you thinking they don't want you making decisions.

And that's what we're doing at the fatality network we're making, we're helping you be a better decision maker and be a better thinker about what's going on and not being someone that just follows what the crowds telling you to do. That's the key to success in an investing. So history would show there are periods of time that stocks don't make sense. You see that that's not going to change. It's like As long as we have humans running this the stock market and buying and investing, that's not going to change. The second.

And this is so key to remember, listen to me carefully. The bad years do more damage than the benefit from the good years. I'll give you an example. The stock market dropped from 2007. In fact, I think I can find this this slide from 2007 down to 2009. Do you realize there's an 18 month period from this point to this point, that 18 month period wiped out 14 years of growth?

Think about that for a second. You've grown your money over 14 year period, and you lose that entire 14 year growth in 18 months. That's what happened to many, many investors during the financial crisis. And so, during times of market people, the mutual fund industry will send out these what I call them hand holding pieces. Therefore advisors to give and share with their their clients to justify staying invested that it's all going to be okay. Can't make this up.

The one mutual fund company sent out a flyer that said, Don't worry about what's happening because there's more good years than there are bad years. And that just totally misrepresents what why that's the case. Sure, you should worry because you have to have way more good years because the bad years are so bad. That wipes out so many the good years. And it's just it's interesting to me that they would actually that they would actually say that as a positive. Let's go forward.

The third one, and that really the last two are my biggest issues with buy and hold. buy and hold is a habit and a mentality. Think about this for a second. If you've been in buying a buy and hold investor for 3040 years, that's what you know. You've seen the market come back. You've lost money, but you haven't needed it.

So you go into retirement remaining a buy and hold investor because that's all you know. And you go through a real bad bear market, you're taking money out, you're retired, your portfolio drops 50% and you find yourself having to go to work. Now this is what because you all you know, is buy and hold investing. Now here is this happened to so many people in 2000, when the market went up from 82 to 2000, is that they made so much money, they decided, Hey, I'm going to retire. And besides the market is going so much higher. And they lost 50 over 50% of their their their money that was generating income, most of which had to go back to work.

I saw this in so many people. And during that bear market, it was a bad situation. So it's a mentality a habit. This is why it's important to change your habits now, so that you're ready for and can transition into retirement, which we'll talk about the minute. When you need the money, it might be the wrong cycle. What I mean by that is that Remember 1982 to 2000.

If you need the money, let's say in 1985, that's gonna work out pretty good for you because you've got basically 15 years of tremendous growth. But if you need the money in 2000, right before the market tanks, that's the thing about buying hold the buy and hold investing, you can't, you don't know that you can't time out the cycle with the markets going through when you're going to need the money. This is why I think it's very important that we have an idea of how the market works. We have a plan a and a plan B mentality and develop that habit. It's something you develop over time, and so that when you get ready to retire when you get ready and you need the money, you understand how the stock market works, and you understand what you need to do.

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