Financial educator Brian Feroldi’s bear market playbook

In this week’s episode of Opto Sessions, investment educator, author and YouTuber Brian Feroldi discusses the mechanics of stock markets and why investing requires a long-term mindset. He also tells listeners about his research process for picking stocks, and names a company that he expects to be invested in for a long time.

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As Wall Street teeters on the brink of bear market territory, investment educator Brian Feroldi imparts his wisdom to Opto Sessions’ listeners on how to handle downturns.

The author of Why does the stock market go up? recognises that dealing with market corrections and crashes is “by far the hardest part of investing”. Dissecting the “extreme psychological shifts” that drive financial markets is a very challenging part of investing, but it’s something that everyone has to deal with, he explains.

Investors’ emotions tend to sway between fear — when in a bear market — and greed — when in a bull market — which makes downturns a buying opportunity. However, while it investors jumping in may expect to see outsized returns from short-term trades, Feroldi says that compounding wealth is a long-term mindset. “The biggest principle that I’ve learned over time is to shift my mindset from build wealth rapidly by taking huge risks to build wealth slowly by substantially reducing my risk.

“If you’re going to be investing, you have to understand that bear markets are going to happen. There’s nothing that you can really do about them and when you’re in them, the way to approach them is to prepare for them before they happen.”

Feroldi’s stock picking strategy involves writing down a list that compares companies’ positive and negative business attributes. Some positive factors include a strong balance sheet, a high gross margin, high growth, low customer acquisition costs and recurring revenue. Meanwhile, negative signs might be accounting irregularities, customer concentration, a high dilution rate and operating in an industry that’s in decline, for example.

The next step in his research process is to then rank the list of companies in order of positive and negative attributes. “This is a really thought-provoking process because it’s hard to weigh these things against each other.”

One company that scores highly in Feroldi’s own list is Adobe [ADBE]. When the stock was first recommended to him, Feroldi explains that he initially dismissed it before running the stock through his checklist and finding that it aligned with his investing style. “I’ve since bought Adobe many, many times and I could see myself holding the stock for a long, long time.”

When looking for stocks that might be undervalued amid a broader selloff, price-to-earnings is Feroldi’s favourite metric. However, he notes that due to recent changes to accounting standards in the US, it doesn’t work on a lot of companies.

“I’m a bigger fan of using very simple valuation tools such as price-to-free-cash-flow, price-to-earnings, price-to-sales and figuring out if the numbers make sense, when compared to the long-term opportunity. But valuation is a very, very tricky thing.”

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