This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Investors have had a rough go of it in 2022. All three major indices are in a bear market, which is a drawdown of at least 20% from the high. However, many well-known individual stocks are down far more.

Out of the 10 largest stocks by market cap in the Nasdaq Composite (NASDAQ: .IXIC), seven are down over 30% from their all-time high, and two are down over 60%. Many growth stocks are down over 80% from their highs.

Investing is easy when most stocks seem only to go up. But when an investment portfolio is down big, it can be challenging to stay even-keeled and focus on the long term. You can't wave a magic wand and wish a stock to go up. But you can take actionable steps to position your portfolio to outlast a prolonged bear market. Here are three steps worth considering now.

1. Give your portfolio a checkup

Revisiting your holdings is a good practice, no matter the market cycle. But the exercise can be taken a step further in a bear market. Outlasting volatility becomes a little easier if you remember why you bought a company in the first place.

For most quality businesses, the investment thesis probably hasn't changed between a year ago and today. Granted, margins may be under pressure, earnings may be declining, and growth rates may be slowing. But businesses don't experience linear growth. Rather, ebbs and flows are simply par for the course.

A good example of a company whose business remains largely the same is Google's parent company Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). Due to its dependence on advertising revenue and a strong economy, Alphabet's business is facing short-term headwinds. However, the investment thesis for Alphabet hasn't changed at all. Alphabet stock may be down 35% from its all-time high -- around the same as the Nasdaq Composite. But that doesn't mean that Alphabet, as a company, is in trouble.

The same can't be said for companies that aren't free-cash-flow positive, are unprofitable, are losing their competitive advantages to larger companies, or depend on debt or equity financing to stay afloat. Rising interest rates and a challenging business climate are headwinds for most companies. But for some, they could lead to unsustainable cash burn and a reason to reconsider owning the company.

2. Update your savings plan

Over time, dollar-cost averaging into your favourite companies has been a tried-and-true method for compounding wealth. Saving more can be a great way to accumulate additional shares of your favourite companies, especially when they are on sale.

Saving more money isn't easy. But purposeful saving can be achieved by making a list of companies to buy every two weeks, month, or whatever increment of time is best for you.

Bear markets have historically been excellent times to add shares. The problem for most investors is that they don't have cash on the sidelines to buy stocks on the cheap. However, investors who are still in the asset accumulation stage of their lives -- as in they make more money than they spend -- are at an advantage because they can put more money to work and likely have that capital go even further.

3. Zoom out and focus on your financial goals

No one likes losing money. But an even worse feeling is losing money in an unexpected way by owning companies that don't fit your personal risk tolerance or investment time horizon.

Investors that are in the asset accumulation stage of their lives can afford to take more risks by letting an investment thesis play out and outlast the volatility. However, investors in the asset distribution stage of their life are spending more than they are making and therefore tend to be more risk averse.

If you are a retiree with high-risk, high-reward stocks that could lead to missing your financial goals, it may be time to rethink some positions. The same disconnect between financial goals and investment holdings can occur if an investor winds up owning too many stodgy companies when they don't mind taking on more risk when asset values are lower.

In a bear market, it's important to remember that investing isn't about beating the market. It's about reaching your financial goals in a way that is comfortable, lets you sleep at night, and is aligned with your risk tolerance. In a bull market, it's easy to be complacent. But bear markets have a habit of catching investors off-guard. For investors whose portfolios are already mostly in line with what they want to own, the best course of action may be to simply do nothing at all.

Resisting fight or flight

It's human nature to want to do something, anything, to rectify steep losses. But often, heavily trading through a bear market can do more harm than good. By taking action through a portfolio checkup, updating your savings plan, and bridging the gap between your holdings and your financial goals, an investor can feel a sense of empowerment even if their screen continues to be painted red with falling stock prices.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Do these 3 things now if your portfolio is down big appeared first on The Motley Fool Australia.

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Daniel Foelber has positions in Alphabet (A shares). Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool Australia has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The stock market sell-off has compressed the valuations of good and bad businesses alike. All three major indexes -- the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite -- are in a bear market. And while it may be tempting to go bottom fishing by scooping up shares of stocks that are down big off their highs, the safer and potentially more rewarding route is to simply stick with top companies that stand out from the competition.

Investors categorize stocks into buckets -- like growth stocks versus value or dividend stocks. But no matter the size of the company or its industry, there's one key trait that all top stocks share: consistency. Here's why investing in consistent companies can be an excellent strategy for outlasting a prolonged bear market.   

Setting expectations

Consistency can take different forms depending on the company. But as a rule of thumb, consistent businesses are those that bridge the gap between expectations, financial goals, and real results.

As a recent example, FedEx's (NYSE: FDX) inability to forecast accurately caused the largest single-day percentage stock decline in company history. The shipping specialist's upbeat tone and record guidance from late June proved to be way off base after it called for lower-than-expected first-half fiscal 2023 results and failed to provide full-year fiscal 2023 guidance.

FedEx has a track record of inconsistency that dates back to the peak of the U.S.-China trade war in 2018, when the company produced lower-than-expected results and routinely missed guidance. FedEx may be an inexpensive stock with a decent dividend yield. And it could even be a nice turnaround play. But it is far less consistent than its peer, United Parcel Service (NYSE: UPS).     

UPS has a better track record than FedEx of hitting its financial guidance, navigating challenges, and deploying capital efficiently without overspending. The package delivery industry is cyclical and capital-intensive. UPS and FedEx depend on a blend of business-to-business and business-to-consumer deliveries to domestic and international buyers. Both companies sport incredibly sophisticated supply chains, logistics, and distribution networks. Labor and fuel costs are high, making forecasting an essential quality of a good package delivery company. No one has a crystal ball. But being roughly right when it comes to accurately predicting buyer behavior separates an excellent package delivery company like UPS from an OK one like FedEx.

In sum, the main differentiating factor between these two companies isn't their dividend yields, valuation, or even a year's worth of revenue or earnings. Rather, it is the ability of UPS to better leverage its resources and capital to execute on goals and limit disappointing shareholders. 

Delivering on long-term targets

Another core trait of consistent companies is their ability to deliver on long-term targets. For some companies, that could simply mean growing the dividend and supporting it with free cash flow (FCF) or sustaining a high profit margin while growing the top line. For others, it could mean bringing a new product or service to market and increasing customer adoption and retention.

Apple (NASDAQ: AAPL) is an excellent example of a company that has delivered on its long-term targets. It wasn't long ago that investors questioned the feasibility of Apple's wearables, its penetration into wireless earbuds, its ability to continue generating growth from its phones and computers, and the establishment of its services segment. Apple has proven that it has arguably the strongest consumer electronic product ecosystem of any company in the world. Its ability to make new versions of its flagship products while also integrating new products and services into the ecosystem has led to sustained growth, high margins, efficient use of capital, and outsized profits.

Apple has shown that despite its size, it can still grow quickly and drive shareholder value through organic growth and boosting earnings per share through buybacks. The below chart says it all.

AAPL Shares Outstanding data by YCharts

In just five years, Apple has more than doubled its net income and reduced its outstanding share count by a staggering 21.6%. Apple's ability to reinvest capital efficiently in its business and still have plenty of dry powder to buy back its own stock is a testament to the success it has had with hitting its long-term goals of product innovation and vertically integrating its business with both hardware and software. Companies a fraction of the size of Apple tend to have trouble growing profits at a faster rate than revenue. But Apple's ability to drive profits at a faster rate than sales is an example of its pricing power and loyal customer base. 

Profiles in consistency

UPS and Apple are just two examples of the many consistent companies that are on sale now. Although they are in different industries and have little in common as companies, they are very similar investments. At the end of the day, long-term investing aims to find companies that can continue delivering growth over time.

For UPS, growth results in a larger dividend, the expansion of routes and services, and branching into new markets such as healthcare and automotive. 

In Apple's case, growth results in share buybacks, product development, and expanding its ecosystem to retain existing customers, boost revenue per customer, and attract new customers into the ecosystem. 

By understanding what consistency looks like, an investor can put their hard-earned savings to work in quality companies no matter the industry.      

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post The no. 1 quality that top stocks share (and it's not even close) appeared first on The Motley Fool Australia.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple and FedEx. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Gold has underperformed the US stock market over the long term. However, the yellow stuff has a reputation for being a safe haven asset amid times of uncertainty. And many have even referred to gold as an inflation hedge.

For part of 2020 to 2022, the inflation hedge story rang true as gold passed $2,000 per ounce for the first time in history in 2020 and then reached an all-time high of $2,074.60 per ounce in March 2022.

But in the last four months, gold suffered an 18% drawdown from that high -- meaning that gold is nearly in a bear market during a time when it should be holding its value. In this vein, gold seems to be failing as an inflation hedge. And in fact, there is data to suggest that gold's reputation as an inflation hedge has been largely exaggerated, even by historical measures. 

Here's what's pressuring gold now -- and why it may be a good buying opportunity despite not being an effective inflation hedge. 

1. A strong US dollar

A slowdown in economic growth and rising geopolitical issues tend to help the price of gold. However, a strong US dollar hurts the price of gold, because a strong US dollar relative to other currencies makes it more expensive for foreign buyers to purchase US dollar-denominated gold.

The US Dollar Index, which tracks the value of the dollar relative to the value of the euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona, is at a 20-year high. Part of the ascent is due to the US Federal Reserve rapidly raising interest rates to combat inflation. High interest rates encourage foreign investment in US Treasury bonds. High interest rates also mean that holding gold has an opportunity cost, given it doesn't pay interest like a US certificate of deposit.

In past US recessions, the Federal Reserve would lower interest rates and hopefully weaken the US dollar in an effort to encourage domestic consumption and make it less expensive to export US goods. However, because the Federal Reserve's priority No. 1 is lowering inflation, not preventing a recession, the dollar could remain strong for the foreseeable future. A strong dollar is arguably the biggest headwind holding gold back right now.

Gold Price in US Dollars data by YCharts

2. The rise of digital gold

Over the last few years, there have been several polls that suggest millennials and Gen Z are more likely to view cryptocurrency as a preferred investment than gold. Granted, many of those polls were taken before the recent crypto crash. However, millennials are now the most active generation in the economy given that many Baby Boomers have retired. Less demand for gold as an investment in risk-averse or retirement portfolios could dampen demand.

3. Compelling alternatives

Many investors may feel that beaten-down stocks are a better buy now than gold. They are probably right. Gold may be down 18% from its high, but there are plenty of top stocks that are down well over 50%. Even several well-known Dow Jones Industrial Average components, such as Nike, Home Depot, and Salesforce are all down between 30% and 53% from their all-time highs. 

Legendary investorWarren Buffett has long said that gold is a bad investment because its growth prospects are limited to supply and demand, rather than a company that can grow with innovation and good management. By keeping cash on the sidelines or buying gold now, an investor essentially says investing in gold is a better use of capital than a different asset.

Why gold may be a good buy now

Despite all the cons discussed, now could be the perfect time to add a bit of gold to a diversified portfolio, especially if that portfolio is in need of lower-risk assets. Aside from the drawdown in price, gold could be the ideal investment for a prolonged recession, ongoing economic weakness, and could even rebound if the US dollar begins to weaken.

The Federal Reserve has made it clear that it is raising interest rates to combat inflation but that the rises would likely stop once inflation is in check. If unemployment rises, the job market weakens, and the US falls into a recession, inflation would likely ease due to lower consumer spending. That's a terrible setup for most assets, but a decent one for gold.

While it may be tempting to buy shares in a gold mining stock that is down even more from its high, the simplest and safest way to buy gold is to go with an exchange-traded fund (ETF) such as the SPDR Gold Shares (NYSEMKT: GLD) ETF or the iShares Gold Trust (NYSEMKT: IAU). Both of these ETFs are at 52-week lows and are meant to track the price of gold by holding insured physical gold in a trust. The SPDR Gold Shares ETF has an expense ratio of just 0.4%, and the iShares Gold Trust offers an even lower 0.25% expense ratio -- which is a much better and more liquid alternative than buying physical gold bars and paying a hefty premium above spot.

For investors looking for low-risk assets to buy now, opening a starter position in a gold ETF could be a reasonable move to make.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 reasons gold fell to a 52-week low but could be worth buying now appeared first on The Motley Fool Australia.

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Daniel Foelber has positions in iShares COMEX Gold Trust and has the following options: short October 2022 $35 calls on iShares COMEX Gold Trust. The Motley Fool Australia’s parent company has positions in and recommends Home Depot, Nike, and Salesforce, Inc. The Motley Fool Australia has recommended Nike and Salesforce, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Fight or flight is a natural survival mechanism. But history tells us that holding through periods of volatility is the best way to compound wealth over time. It's tempting to fight a bear market by shifting your investment strategy toward whatever is working in the moment, or to sell everything and clear your head.

Here's why defying instincts is one of the hardest parts of investing, but why it can be an essential quality for patient long-term investors to master.

Drawbacks of the "fight" response

Actively fighting a bear market involves trying to trade your way through volatility by doing things that you normally wouldn't do, such as rotating out of the worst-performing sectors (like consumer discretionary, communications, and tech) and into sectors that are doing well right now (like energy and utilities), or worrying more about the next quarter than the next five years.

Hedge fund managers may lose clients over a bad quarter. But as an individual investor, all you have to worry about is reaching your long-term financial goals -- which takes the pressure off short-term market gyrations and makes it easier to hold through periods of volatility.

There's a big difference between positioning your portfolio for long-term success and actively fighting a bear market. The former is a worthy exercise, no matter the market cycle.

For example, the long-term investment thesis for a company could change for several reasons. It could have a weak balance sheet, lack positive cash flows, or be making less money, which could force it to take on debt at a higher interest rate. Maybe the company is losing market share to a better-positioned competitor with deeper pockets. Consolidation is a common outcome of economic downturns, as companies with more resources have the means to gobble up smaller companies that are vulnerable to macroeconomic factors.

While an investor shouldn't overhaul their entire approach just because the stock market is going down, now is definitely a good time to make sure you are invested in companies you understand, believe in, and that have a good shot at growing for decades to come.

Drawbacks of the "flight" response

For many investors, the growth stock bear market of 2021 and 2022 is the longest bear market of their investing careers. And now that the S&P 500, Nasdaq Composite, Nasdaq 100, and the Russell 2000 are all in bear markets (meaning a drawdown of at least 20% from the all-time high), and the Dow Jones Industrial Average is just one percentage point away from a bear market, fears of a prolonged bear market are mounting.

^SPX data by YCharts

Each passing down-day can take a toll on an investor and make the urge to sell and walk away look even more appealing. But history tells us that bear markets can create life-changing buying opportunities for folks who have the patience to ride out the storm.

It's one thing to look at history and realize that selling during a bear market has so far never been the right long-term move. But when you're in the thick of one, it helps to have some points to fall back on.

For me, the best approach is to simplify the situation: Does the business have the fundamentals to outlast several quarters of negative economic growth? Is it going to take market share during a recession or lose it? How vulnerable is it to the short-term challenges, and do those challenges affect the long-term investment thesis?

If you go through this exercise enough, chances are you'll realize that many industry-leading companies look like compelling buys, while many smaller companies whose growth was largely attributed to inexpensive capital and rising stock prices that made for easier equity financing are in a precarious position.

The benefits of just standing still

One of the best approaches for most investors could be to pick their favorite name-brand companies and hold them. It's a beautifully simple strategy that also helps you sleep at night. No matter how bad the sell-off gets, you can rest easy knowing that these large companies have been through a recession before and have often emerged stronger on the other side.

Despite decades of wisdom and access to a limitless treasure trove of information, many investors fail to beat the market mainly because they make a simple mistake, such as fighting or fleeing from a bear market. As difficult as it is to do nothing and just stand still in a bear market, it's the most effective and simple way to compound wealth over time. Avoiding mistakes like selling an asset at a bargain-bin price are just as important as making good decisions.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post The surprising reason why you should fight your own instincts in a bear market appeared first on The Motley Fool Australia.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

In 2020, Morgan Housel released The Psychology of Money. I think it deserves to be on the Mount Rushmore of investing books, especially for folks who believe history and behavioral psychology are critical elements for investing.

In the book, Housel has a section describing the stock market as a field where multiple games that have nothing to do with each other are being played at once. To quote from the book:

Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.

Here's why this simple concept has lifelong impacts on your money and why it's the best investing lesson I ever learned.

Understanding a stock's price

A stock's price at a given time is merely a representation of the consensus value determined by buyers and sellers. But many of these players' motives and reasons for buying or selling the stock are completely different from yours.

For example, you have retail investors and institutional investors. Retirees and college kids. Long-term investors with multi-decade time horizons and day traders. Short-sellers and folks who only stay on the long side. Options and futures traders and those who only buy shares in stocks. The list goes on and on.

Housel's point is that many of these games have conflicting influences over the price action of a given stock. And for that reason, the price of a stock seldom resembles its long-term intrinsic value.

The tug-of-war between greed and fear

At certain times, the price of a stock can be dominated by greed and, at other times, it can be dominated by fear. In today's brutal bear market, that means you have some traders who may dump perfectly good growth stocks and move into value simply because they are fearful.

They decide they would rather own a stable business with a good balance sheet and positive free cash flow than take a risk on a company whose value comes from what it could be worth in future years and not what it is worth today. As a result, we continue to see exciting growth companies with a lot of potential get sold off heavily in the short term due to panic.

On the flip side, a lot of value stocks, and oil and gas stocks, were arguably underappreciated in 2020 and 2021, while some growth stocks saw their valuations get ahead of themselves. In those years, we saw investors take more risks and cast out companies with low growth. We saw a disregard for the geopolitical importance of utilities, energy stocks, and defense stocks in favor of bets on the next big thing.

Real-world examples

The point here is that you can gain clarity by remembering that a lot of the money in the stock market is playing a completely different game than you are. Once you understand that, it's easy to see why an excellent company like Amazon can fall by over 30% in a couple of weeks for little more than a mediocre earnings report and broader market volatility.

Let's take the example a step further with a stock like Shopify (NYSE: SHOP). Shopify closed the 2019 calendar year at just under $400 a share. It gained tons of momentum during the pandemic as e-commerce grew and the gig economy went into full effect. It ballooned to a market cap of over $200 billion and an all-time-high price per share of $1,762.92 on November 19, 2021; and has since slid to its current price of around $335 per share.

Shopify stock embodies several different games being played at once. On the one hand, you have long-term investors who believe in Shopify's ability to add new merchants, have existing merchants upgrade to more expensive plans, and have those merchants earn more money which benefits Shopify. Then you have a series of folks who were only buying Shopify as a short-term 'pandemic play' and don't care about the underlying business -- which was a big reason why Shopify stock ran up too far, too fast in 2021.

But today, you have yet another game being played -- the game of losing patience by selling growth stocks that make little to no profit and seeking cover in safer names. Once an investor realizes these conflicting games, it starts to make sense why a stock like Shopify can go from boom to bust. It doesn't make the price action in either direction right; it just helps explain why it happened in the first place.

A lesson from Warren Buffett

Warren Buffett is an excellent example of an investor who knows exactly what game he is playing. Buffett has repeatedly admitted he is unlikely to outperform a raging bull market because he doesn't invest in many growth stocks and sticks mostly to value. But he still believes he will outperform the S&P 500 over time -- which has been true over his long-term track record.

Berkshire Hathaway's portfolio may look overly conservative as it contains a lot of insurance companies, banks, oil and gas stocks, and consumer staples companies. But for Buffett, these are the kinds of businesses he wants to invest in. It's his game, and he's playing the stock market according to his own rules and risk tolerance.

An individual investor has no control over the broader stock market. So, imposing control over our investment decisions and style is the best way we can feel comfortable and achieve direction when stock prices seem to rise and fall randomly.

The silver lining

For long-term investors in stocks like Shopify, the whipsaw price action of 400% gains followed by 80% losses in just a two-year period can be confusing and annoying. It can be hard to know a fair price for a company when conflicting motives are tugging at its stock price. However, there is a silver lining.

Over time, fundamentals always win out. One look at the stock charts of successful companies like Nike or Apple, and you'll quickly see that sell-offs are simply par for the course for a successful long-term investment.

The beauty of long-term investing is that it is one of the few games where the odds are in your favor. The stock market tends to fall faster than it goes up but goes up more than it goes down. The average compound annual growth rate of the S&P 500 with dividends reinvested since 1965 has been around 10.5%. That's a massive tailwind for long-term investors to benefit from compound interest.

By investing in quality businesses that you understand and letting time be an ally, an investor stands a better chance of ignoring the noise of the market and focusing on what matters most.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post The single greatest investing lesson I ever learned appeared first on The Motley Fool Australia.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has positions in Shopify and has the following options: long September 2022 $600 calls on Shopify and short January 2024 $600 calls on Shopify. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon, Apple, Berkshire Hathaway (B shares), Nike, and Shopify. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $1,140 calls on Shopify, long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $1,160 calls on Shopify, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Amazon, Apple, Berkshire Hathaway (B shares), and Nike. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Inflation is on the minds of investors, policymakers, and everyday Americans. We can feel it at the pump, at the grocery store, the post office, and even the barbershop. Since inflation is higher than the rate of economic growth, the real gross domestic product for the first quarter of 2022 decreased by 1.4% year over year. If we get another negative reading for the second quarter, the US economy will officially be in a recession.

Both Warren Buffett and Charlie Munger spoke about inflation at Berkshire Hathaway's (NYSE: BRK.A) (NYSE: BRK.B) annual shareholders' meeting on Saturday. Here's what the longtime chairman and vice chairman said and how they're positioning Berkshire to ride out the storm.

An unavoidable consequence

Buffett and Munger both spoke negatively about the state of the economy due to inflation and how it is largely a result of loose fiscal and monetary policy. This policy artificially inflated demand and effectively caused a supply/demand imbalance -- the cure for which was rising prices to try and lower demand. And now, the remedy seems to be raising interest rates to try and reduce demand. "We are seeing an unleashing of the fact that we just mailed a lot of money one way or another," said Buffett.

However, Buffett and Munger view inflation as a necessary consequence to get the US out of what could have been a COVID-19 induced depression.

"We've had a lot of inflation, and it was almost impossible not to have it if you're going give out the kind of money we gave out. And it's probably a good thing we did it, in fact, I think at one point when the Federal Reserve was creating the money, if they hadn't done it our lives would be worse, a whole lot worse. Now that was an important decision," said Buffett.

In another exchange, Munger said, "It happened on a scale this time that we've never seen before. Those checks are just mailed out to everybody who claimed to have a business and claimed to have employees. They probably drowned the country in money for a while, and as you [Buffett] say, they probably had to do it."

"In my book, Jay Powell [chair of the US Federal Reserve] is a hero," Buffett responded. "It's very simple, he did what he had to do."

Find value wherever it's available

One way of growing wealth during inflationary times is looking for opportunities that aren't otherwise available. The trick is having plenty of experience looking for those opportunities in other economic conditions, too. "We depend on mispriced businesses through mechanisms where we aren't responsible for the mispricing of them," Buffett said.

Buffett surprised investors when he disclosed a roughly 9.5% stake in Activision Blizzard. The stake is worth about $6.2 billion as of Friday's close. Buffett owned about $1 billion of Activision before Microsoft announced it would acquire it for $95 a share. Buffett then increased Berkshire's position as a classic arbitrage opportunity under the assumption that Microsoft is a reliable buyer and would come through on the deal. That arbitrage opportunity is sizable, considering Activision Blizzard's stock is currently $75.60 per share.

Buffet's Activision Blizzard play is merely an old-school way of finding value in a challenging market. However, regular investors should probably steer clear of these kinds of investments, as the deal isn't based on fundamentals and could fall through. You don't want to end up owning a company you don't understand and didn't really want in the first place.

So what can you do?

Learn from Buffett's actions

It's all good and well to say that inflation is unavoidable. But the real question many investors are probably wondering about is how to position their portfolios for prolonged inflation.

First off, it's important to remember that economic cycles are simply par for the course in a long investing career. Whether inflation is the cause of a sell-off or not is secondary. The bigger takeaway is that a bear market can create life-changing wealth for investors in companies with bright futures, positive cash flows, and durable balance sheets.

What Berkshire is showing through its actions is an increased buying appetite that we haven't seen in years, which indicates Berkshire is finding value -- mainly in the energy sector. In less than a year, oil and gas went from a minor allocation to a major one. Berkshire's Chevron holding has pole-vaulted to its third-largest position, while Occidental Petroleum has been a top 10 holding since Berkshire increased its stake in February and March. Berkshire also took a stake in HP this year, and its acquisition of insurer Alleghany shows its classic value stock bent.

Chevron is known for its industry-leading balance sheet and a low cost of production that allows it to reach breakeven free cash flow even when oil is in the low $40s per barrel. Meanwhile, Occidental Petroleum is a much more aggressive spender and has a higher breakeven than Chevron. But its relatively high capital expenditures have paid off now that oil and gas prices are at eight-year highs. Meanwhile, Berkshire's other major positions are in diversified large companies like Apple and Coca-Cola, which is one of the most recession-resistant and reliable sources of passive income on the market.

Treading carefully in a challenging market

All told, Buffett's actions show that Berkshire is finding value in the market, more value than it has found in years. But that Berkshire isn't just buying the dip on any company. It is selectively buying companies that are contributors to inflation (upstream producers like Occidental) or have relatively reliable cash flows and inexpensive valuations (like Chevron and HP).

For investors who don't manage billions of dollars in assets, sticking with unstoppable stocks you'll want in your corner if the market crashes can be a great way to rest easy at night and endure the gauntlet of a bear market.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Activision Blizzard, Apple, Berkshire Hathaway (B shares), and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Activision Blizzard, Apple, and Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

1. It's a staircase up and an elevator down

^SPX data by YCharts

2. Valuations matter

3. Invest in companies that you understand and that suit your personal risk tolerance

Embrace lifelong learning

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Daniel Foelber has the following options: long January 2024 $100 calls on Teladoc Health, long January 2024 $150 calls on Teladoc Health, short January 2024 $110 calls on Teladoc Health, short January 2024 $170 calls on Teladoc Health, and short July 2022 $7.50 puts on SoFi Technologies, Inc. The Motley Fool has positions in and recommends Amazon, Meta Platforms, Inc., Teladoc Health, and Upstart Holdings, Inc. The Motley Fool Australia has recommended Amazon and Meta Platforms, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Saturday was the second day of the 2022 New Orleans Jazz and Heritage Festival -- an event of music and celebration that attracts people from all over the country. Yet there was a different and more reflective jazz festival taking place about a thousand miles northwest, at Berkshire Hathaway's (NYSE: BRK.A) (NYSE: BRK.B) annual shareholder meeting in Omaha.

Miles Davis said that "it's not the notes you play, it's the notes you don't play". And that feeling rang true at Berkshire's meeting.

Despite Berkshire being up 8% on the year compared to a 13% loss for the S&P 500 and an over 20% loss for the Nasdaq Composite, there was little to no showboating from Chairman Warren Buffett or Vice Chairman Charlie Munger. Instead of bragging about the outperformance of value stocks over growth stocks, their attention was on protecting shareholder capital paired with a deep sense of responsibility to keep cash on the balance sheet and exhibit discipline during an uncertain time of high inflation and rising interest rates.

Here's what Buffett and Munger didn't say that spoke volumes at the 2022 Berkshire shareholder meeting.

Invest in yourself

Buffett said that the best vehicle you can invest in is yourself. "Nobody can take away from you the talent you have," he said. "The truth is, the world will always need to do something and some people will not have skills and they will get less of the product of the society than somebody who has other skills. Sometimes that has something to do with education, but a good bit of the time it doesn't have anything to do with education."

It's a theme Buffett returned to frequently, especially in his comment that "you ought to be a better person in the second half of your life than the first". Compounding wealth isn't just financial -- Buffett seemed to imply that the best defense against inflation on the personal level is to make lifelong contributions to the world.

Speaking of which...

Invest in companies with wide moats

Buffett also may have been indicating that the best companies to own are the ones that are also exceptionally good at something and do whatever they do better than their competitors. This doesn't always mean their stocks will go up or even outperform the market. But it does mean that over the long run, these companies are developing the kind of foundation that outlasts economic cycles and delivers long-term growth.

If we look at Berkshire's top 10 list of public equities, it's very clear that every single one of them, from Apple to Chevron, is a leader in their respective industry.

Can Berkshire last forever?

A writer named Charles Michael Palahniuk famously said, "We all die. The goal isn't to live forever, the goal is to create something that will." That seems to be the feeling that Buffett, who will turn 92 on 30 August, has right now.

Although Buffett is still sharp as a tack, no one knows when the last Buffett-led Berkshire meeting will be. When asked about his succession, Buffett didn't focus on the inner workings of the board of directors, or the voting power of the shareholders, or even the strategy of the investment team. Rather, he talked extensively about the Berkshire culture almost as an embodiment of his values that will carry on even after he and Munger are gone.

"Berkshire is built forever. There is no finish point. We have no one thinking about if their options are vested," Buffett said.

It could be that Buffett believes the superiority of the Berkshire culture is hidden right now because all the spotlight is on him, and that when he's no longer in charge, folks will begin to realise why people like to work for Berkshire and why it's a business that is so much more than just Buffett and Munger.

Life-changing wealth

The individual investor can take away the importance of building an everlasting portfolio that will continue to grow even after we pass. Buffett is big on the power of compound interest and routine saving. In fact, by starting with $0 and investing $10,000 per year into a retirement account for 50 years at a compound annual growth rate of 10%, an investor would end up with $11.64 million. This long-term mindset can lead to generational wealth using a relatively attainable savings plan.

As for Berkshire Hathaway, it's likely that Buffett's leadership and investing philosophies have the staying power to transcend his lifetime too. For that reason, Buffett seems less concerned with the performance of Berkshire versus the S&P 500 into the future, and much more focused on ensuring his company culture remains intact.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 lessons from what Buffett didn't say at Berkshire Hathaway's shareholder meeting appeared first on The Motley Fool Australia.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple and Berkshire Hathaway (B shares). The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple and Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Mr. 300%

BRK.A Total Return Level data by YCharts

Keeping a large cash position and protecting investors

A dig at cryptocurrency

No limits

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Warren Buffett talks cash and more at Berkshire Hathaway's annual meeting appeared first on The Motley Fool Australia.

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American Express is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Activision Blizzard, Apple, and Berkshire Hathaway (B shares). The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Activision Blizzard, Apple, and Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Tesla (NASDAQ: TSLA) CEO Elon Musk is as polarizing of a figure as they come. On one hand, he has propeled the electric vehicle (EV) industry forward from a doubted concept to become a trend that legacy automakers are trying to ride. But he also receives criticism for actions like his online behavior and making a multi-billion-dollar offering to buy Twitter (NYSE: TWTR).

However, there's no denying that Tesla is a remarkable company. Tesla stock is up on the year while the Nasdaq Composite is down 13% and virtually every major carmaker to EV newcomer -- from Toyota to Rivian Automotive, is down 5% to 66%. Here's why Tesla continues to defy the Nasdaq's gravity in 2022, and whether the stock is a good buy now. 

1. Tesla is outperforming the competition

Tesla tends to report its quarterly production and delivery numbers about two to three weeks prior to its earnings report. On April 2, Tesla reported quarterly production of 305,407 units and deliveries of 310,048 units, which was a big jump from Q1 2021 results of 180,338 units produced and 184,800 units delivered. However, the quarter-over-quarter growth marked a major slowdown compared to what investors were used to, as Tesla produced 305,840 units in Q4 2021 and delivered 308,600 units. Tesla attributed the slowdown to supply chain challenges and factory shutdowns. 

However, Tesla's growth outlook is favorable. The company began production and delivery from its Berlin factory in March and just started production from its Texas factory in April. The opening of the two new factories will alleviate pressure from Tesla's Shanghai factory and could allow it to keep managing supply chain challenges and the global chip, material, and battery shortage better than its peers.

In its recent investor presentation, Tesla said that it began deliveries of its crossover SUV, the Model Y, from its Texas factory and Germany factory -- while also making an effort to move battery cell production in-house and diversify its supply chain and procurement process. 

In sum, Tesla is showing resilience during an industrywide shortage while charting a path toward another record production and delivery year in 2022.

2. Tesla is growing faster than ever

Even with lower Q1 2022 production and delivery figures, it's worth mentioning that Tesla's revenue, earnings, and free cash flow growth continue to impress investors.

The company recorded Q1 2022 automotive revenues of $16.86 billion, a year-over-year increase of 87%. In Q1 2022 alone, Tesla produced 36% of the automotive revenue it earned for all of 2021.Tesla cited its increased selling price as one of the reasons for higher revenue growth. 

Despite the higher revenue, Tesla's operating expenses were about the same at $1.86 billion compared to $1.62 billion in 2021 -- just 15% higher despite total revenues being 81% higher. Similarly, Q1 2022 net cash provided by operating activities was 143% higher compared to Q1 2021 but capital expenditures were only 31% higher, while led to free cash flow of $2.23 billion -- the second-highest quarterly performance ever. Tesla ended the quarter with $17.51 billion in cash and cash equivalents on its balance sheet. 

3. Tesla is more profitable than ever

One of Tesla's most impressive stats is its operating margin. Unlike gross margin, which factors in the cost of goods sold, the operating margin also factors in operating expenses like utilities, wages, selling, general, and administrative expenses, sales and marketing, research and development, and other costs that are related to running the business. Tesla notched a record high operating margin of 19.2% in Q1 2022, meaning for every $1 it made in revenue it earned an operating profit of 19.2 cents. For comparison, here are the 2021 operating margins of major automakers, including Tesla.

TSLA Operating Margin (Annual) data by YCharts

Tesla cited higher vehicle deliveries, increased average selling prices, reduced cost of goods sold, lower stock-based compensation, and increased regulatory credit sales as profitability drivers that offset higher raw material costs, commodity, logistics, and shipping costs and an increase in operating expenses. 

In an industry constrained by rising raw material costs, rising parts and components costs, higher shipping and freight costs, and higher labor costs, it is impressive to see Tesla grow its operating margin when other major automakers will likely report lower operating margins in the quarters to come.

Tesla is a phenomenal company but an expensive stock

The investment thesis for Tesla remains intact. And in many ways, it is becoming harder to argue that Tesla isn't the best global automaker. It has the greatest growth prospects, the best technology, and is ahead of the curve while the competition tries to catch up, it continues to deliver on its promises. Tesla is more profitable than ever and it has its own charging network plus investments in solar energy and energy storage. It also has a lean business model that doesn't depend on the dealership network. But as Warren Buffett famously said, "you pay a very high price in the stock market for a cheery consensus." Put another way, great companies are often expansive stocks. And that logic applies perfectly to Tesla.

Tesla's market cap is $1.08 trillion. It earned adjusted diluted non-GAAP earnings per share (EPS) of $3.22 in Q1 2022. So even if Tesla continues to grow earnings and earn, let's say $15 in adjusted 2022 EPS, it would still have a forward price to earnings ratio of roughly 70. Tesla stock is by no means cheap. And it shouldn't be -- it's a really really good business. For risk-tolerant investors who are optimistic about the growth of the EV industry, adding Tesla to a diversified basket of EV stocks isn't the worst idea so long as it's understood that Tesla stock is prone to sharp gyrations to the upside and downside. In the last year alone, Tesla stock has been as high as $1,243.49 per share and as low as $546.98 per share. 

As with every business, it's important to understand what you are buying and why you want to own it. With Tesla, the investment thesis is simple. It's a bet on the long-term growth of EV adoption via buying the industry leader for a premium price. For some folks, that's a thesis that makes sense. But for others, the electric car stock may simply be an impressive company that is just too expensive to consider now. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 reasons Tesla's monster earnings can help it keep crushing the Nasdaq in 2022 appeared first on The Motley Fool Australia.

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Daniel Foelber has the following options: long May 2022 $705 puts on Tesla and short May 2022 $700 puts on Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Tesla and Twitter. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The Nasdaq Composite exploded higher by 9% over just five recent trading days, pulling the index out of its brief stint in a bear market. The index remains in correction territory, but the rebound is a big reprieve. But we aren't out of the woods yet.

No one knows if the market will retest its 2022 lows. What we do know is that volatility remains high, and the month of March has been chock-full of broad market gyrations with several big days to the upside and the downside.

Given all the uncertainty, it's better to prepare for further downside now than be complacent and get caught off guard. Here are five questions you should ask yourself in case the stock market keeps crashing.

1. Why are you investing?

The stock market is but one playing field upon which several different games are simultaneously being played. Some folks are day trading and care nothing about fundamentals. Instead, their focus is on short-term price action and technical analysis. Others are trying to bet big on a moon shot. Some people are trying to beat the market over a multi-decade time horizon. And many folks are simply focused on capital preservation or passive income generation in retirement. There's a big difference between a Wall Street hedge fund with billions of dollars under management and an 18-year-old kid with $500 in spare cash they made over the summer.

Once you begin to understand the different types of investors and their different motivations, it becomes easier to understand why stock prices can do crazy things. Put a different way, knee-jerk reactions and market volatility become less surprising.

Although it can be tempting to try to time the market, the best an investor can do is be roughly right, pick good companies, keep a level head, and let the power of patience and compounding returns do their work over time. These are tools that are free to use, yet many investors ignore them in favor of gambling.

2. What is your time horizon?

Your investment horizon is heavily influenced by age. But it can also depend on different financial obligations or upcoming expenses. Some investors are in the asset accumulation phase, while others are in the asset distribution phase.

Younger investors who still have their highest-earning years ahead of them and fewer financial obligations can afford to take risks and can use decades of portfolio growth to their advantage. Investors nearing retirement, or any period where spending may begin to outpace income, tend to be more focused on safeguarding their nest egg and protecting against downside risk. In this sense, an investor with a longer time horizon can afford to have a higher percentage of their assets in growth stocks while a retiree may be more interested in the income from stable dividend payers.

3. What is your risk tolerance?

Looking at a chart of stocks that beat the market over the last few decades is a simple enough exercise. But not all gains are created equal. In fact, some of the best stocks have been extremely volatile and required nerves of steel to hold during certain time periods. For example, Amazon (NASDAQ: AMZN) stock lost nearly 90% of its value in less than 18 months during the dot-com bubble burst in the early 2000s.

Between 23 October 2007 and 20 November 2008, Amazon again lost 65% of its value. And then between 4 September 2018 and Christmas Eve 2018, Amazon lost over a third of its value. However, even if you bought Amazon stock at its peak right before the dot-com bust on 3 January 2000 and suffered through those declines, you would be sitting on a 3,500% gain as of this writing. 

The lesson here is to understand your temperament and risk tolerance before buying a stock. Investors who bought Amazon and panic sold missed out on some major gains. But the decision is all too clear in hindsight and never easy in the moment.

4. How vulnerable are you to volatility?

Exposure to volatility combines your personal investment objectives, time horizon, and risk tolerance. For example, a young investor who hates risk but is investing for the next few decades may find themselves with a higher equities allocation than a risk-tolerant investor who has some major purchases coming up or is nearing retirement.

Understanding you and your family's exposure to volatility is a good exercise that can help build a portfolio that is best for you. Often, being vulnerable to volatility means taking fewer risks and allocating a higher percentage of your savings toward cash and bonds instead of stocks, even though stocks tend to outperform cash and bonds over the long term.

5. What kind of investor do you want to be?

Most of us have our favorite investor role models. Some gravitate toward the characters in Michael Lewis' The Big Short who correctly predicted the financial crisis and made money from it. Others appreciate Peter Lynch's grassroots style or Warren Buffett's patience and wry wisdom. Some folks want to be gunslingers and take bold bets. Others want to stick to what they know and invest in a way that helps them sleep well at night.

At The Motley Fool, we try to foster principles that will give you upside potential, encourage creativity, and provide you with an overall balanced approach. By doing your own research and keeping a diversified portfolio that blends long-term upside with proven winners, you can structure your investments in a way that suits your style.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 5 questions to ask yourself in case the stock market keeps crashing appeared first on The Motley Fool Australia.

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Daniel Foelber has no position in any of the stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has gotten a lot of attention as of late, and for good reason. Despite Buffett's long-term outperformance, Berkshire Hathaway had been underperforming the S&P 500 and the Nasdaq Composite in recent years due to Berkshire's lack of technology stocks that have been responsible for the bulk of the market's gains.

But so far in 2022, Berkshire Hathaway stock is up 16%, while the S&P 500 is down for the year -- largely thanks to the recent success of value stocks relative to growth stocks. What's more, Berkshire Hathaway stock hit a new all-time high on Monday.

Short-term results aside, here are three Warren Buffett lessons that have proved invaluable over time and ring especially true today. 

1. Don't follow the crowd

If there's one thing we've learned over the last two years, it's that following the crowd is a fantastic way to lose money.

After the COVID-19-induced stock market sell-off of spring 2020, meme stocks, unprofitable growth stocks, and pandemic-related stocks took center stage. Companies like Zoom Video Communications and Peloton Interactive produced monster gains, while the energy sector, financials, and real estate stocks got crushed. In 2021, the exact opposite was true, as many of these pandemic winners lost money while the energy sector was the best-performing sector in all of the S&P 500.

Fast-forward to 2022, and several top large-cap growth stocks have seen major drawdowns while value stocks and stable dividend payers have been the real winners. The lesson here is that jumping in and out of what is working or not working in a given time period is a bad idea. For years, Warren Buffett and his team were scrutinized for keeping a large cash position and not buying more stocks. But in the end, Buffett's patience paid off, as Berkshire has had plenty of dry powder to pounce on opportunities, as evidenced by its recent acquisition of Alleghany. 

2. Invest in what you know

Buffett is a proponent of investing in what you know so that you have an advantage in the stock market. It's a simple enough task, but it's actually pretty hard to execute in practice.

Times change, and the economy is becoming more digitalized than ever before. Investors who may not understand technology-focused companies could follow Buffett's footsteps and basically ignore the sector or invest in a relatively easy-to-understand business like Apple.

However, another option is to learn about a business and listen to the quarterly earnings calls. It requires more work but will also give you the tools you need to hold a company through tough times and let the investment thesis play out. And if the investment thesis begins to change or the company loses its edge over the competition, you'll be better positioned to exit the position and avoid a falling knife.

3. Greed and fear

Typing it all together is Buffett's famous quote to "be fearful when others are greedy, and greedy when others are fearful." The advice applies perfectly to buying the dip in the U.S.-China trade war-induced sell-off at the end of 2018, the 2020 sell-off, and probably will apply well to the current sell-off we are in now. However, the advice to be fearful when others are greedy is also worth discussing.

Many growth companies saw their valuations pole-vault to astronomical levels that weren't based on fundamentals or even the most optimistic forecasts. When that happens, Buffett's advice is to be fearful, as it could be a sign of an unhealthy stock market.

Buffett has been a big believer in finding value where others aren't looking. In many ways, the oil and gas industry was chock-full of high-yield dividend stocks and value stocks that investors were ignoring in favor of renewable energy and flashier names. Carbon neutrality is the future. But the world still runs on fossil fuels. Buffett's ability to take criticism and invest in "ugly" stocks allowed him to make brilliant buys, such as the acquisition of some of Dominion Energy's energy infrastructure assets in July 2020, the gradual accumulation of Chevron stock, and other investments made through Berkshire Hathaway Energy, the conglomerate's energy arm. 

Keep your cool when times are tough

When your screen is painted red and stocks keep falling with no end in sight, it's easy to panic and make a decision you might later regret. By relying on timeless investing lessons, investors have a few tools they can pull out when times are tough. Instead of downplaying the emotional side of investing, it's often better to accept the associated emotions and just try and make the best decision you can with what you know.

One of the most comforting facts to fall back on is the long-term performance of the U.S. stock market. That track record teaches us that every sell-off proved to be a great long-term buying opportunity. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has the following options: long January 2024 $145 calls on Zoom Video Communications, long January 2024 $45 calls on Peloton Interactive, short January 2024 $150 calls on Zoom Video Communications, and short January 2024 $50 calls on Peloton Interactive. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Apple, Berkshire Hathaway (B shares), Peloton Interactive, and Zoom Video Communications. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Dominion Energy, Inc and has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple, Berkshire Hathaway (B shares), and Zoom Video Communications. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

It's less than a month into 2022, and already the U.S. stock market is performing differently than in 2021 or 2020. As of market close on Jan. 19, the Vanguard Value exchange-traded fund (ETF) (NYSEMKT: VTV) was down less than 1% for the year, while the S&P 500 was down nearly 5% and the Vanguard Growth ETF (NYSEMKT: VUG) was down over 9%.

For now, at least, value stocks seem to be replacing growth stocks as the new market outperforming group. To illustrate how rare that is, consider that value outperformed growth just two out of the last 13 years. 

Let's determine if now is a good time to rotate out of growth toward value stocks.

1. Determine what kind of investor you want to be

Jumping in and out of what's working in the stock market over the short term is a terrible idea. The last couple of years illustrates this point perfectly.

In 2020, hypergrowth stocks, many of which are unprofitable businesses, propelled the stock market to new heights. Solar and wind stocks also crushed the market, while oil and gas stocks had one of their worst years on record (relative to the S&P 500).

The three worst-performing sectors of the S&P 500 in 2020 -- energy, real estate, and financials -- were the three best-performing sectors in 2021. By the same token, many Cathie Wood-style growth stocks fell over 40% in 2021. Solar and energy stocks drastically underperformed oil and gas last year.

The lesson here isn't just that the market can be irrational over the short term -- it's also that sticking with investments that you like often works out in the end. Those that sold oil and gas stocks in 2020 to buy high-growth stocks in 2021 probably regretted it.

By determining what kind of investor you are and what kind of stocks you like to own, you stand a better chance of eliminating short-term randomness and letting valuations revert to the mean over time. As a bonus, you'll probably be a lot more comfortable. The mental and emotional side of investing often gets overlooked when it comes to financial planning. If you're a value investor who likes dividend stocks and you suddenly find yourself owning mostly growth stocks, you're probably going to be anxious to sell if those stocks go up or desperate to sell if they go down.

VUG Total Return Level data by YCharts

2. Take what the market gives you

After you've determined what kind of investor you are and the companies you like owning, you'll be prepared to buy into weakness and take what the market gives you. Patient investors are in luck because plenty of top-tier growth stocks are down well off their highs right now.

Similarly, value investors had plenty of opportunities throughout 2021 to snatch up shares of top dividend stocks at a steep discount to their current prices.

Most investors probably aren't all-or-nothing when it comes to value, income, or growth. Rather, they probably have a preference but still like some sort of blend of different types of investments.

Timing the market isn't a good idea, but being flexible is. For example, if you missed out on Bitcoin and Ethereum, now is your chance to buy at a better price. If you've been waiting to buy electric vehicle stocks, there are some good buys in that space too.

Keeping some dry powder on the sidelines provides the extra ammo needed to take advantage of dips in great companies.

3. Invest in companies you understand and want to own

One of the worst mistakes I've made as an investor is allocating too high of a percentage of my portfolio toward companies that I don't understand. Peter Lynch, my favorite investor of all time, often joked that people spend so much time dissecting the pros and cons of major purchases like a car or where they are going to live, but are so quick to throw money into a hot investment idea with little underlying knowledge about what they are buying. 

Whether we like it or now, fear of missing out (FOMO) is a strong emotion that can inhibit clear thinking and lead to chasing the next hottest growth stock. That's no problem if the stock goes up. But if it falls, let's say by over 50% as many of the hottest stocks in the Nasdaq-100 have done over the past year, then it's harder to know when the bleeding will stop or have the conviction to hold the stock if you don't understand it.

Be wary of a temperamental market

It seems bizarre that many of 2020's hottest industries and companies would turn on a dime and become 2021's biggest losers. On top of that, you could argue that the market went up too far too fast in 2021, given interest rate and inflation risks. The Fed's decision to raise rates wasn't surprising. You would think that an efficient and forward-looking stock market wouldn't be so quick to drive prices down on predictable news. But so far this year, it has. 

No one knows what the market will do in the short term or how long one trend will last. Instead of banking on value stocks beating growth stocks in 2022, it's best to stick to positions you like and want to hold for several years, thereby limiting the randomness market fluctuations can inflict on your portfolio. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber owns Bitcoin and Ethereum. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and recommends Bitcoin, Ethereum, Vanguard Growth ETF, and Vanguard Value ETF. The Motley Fool Australia owns and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Seemingly every month, a legacy automaker makes an announcement outlining bold plans to decarbonize its operations by investing in electric vehicles (EVs).

Simultaneously, we've seen plenty of new players enter the space, including Chinese automakers like Nio (NYSE: NIO) and U.S. players like Lucid Group (NASDAQ: LCID) and Rivian Automotive (NASDAQ: RIVN). A few years ago, Tesla (NASDAQ: TSLA) seemed like the only true EV investment opportunity. Today, the industry feels more crowded and competitive than ever before.

If you're wondering how to navigate the noise with sound investment ideas, you've come to the right place. Here's the latest on Lucid and Rivian, what makes Tesla unique, and some other investment ideas worth considering now.

Well-deserved praise

Lucid and Rivian have plenty in common. They both have a lot of cash, impressive technology, ambitious plans to disrupt the industry, and are very expensive stocks.

Lucid's competitive advantage is its battery technology, which has allowed it to achieve a longer range and faster charging from a compact configuration. Its battery efficiency of more than 4.5 miles per kilowatt hour is higher than the 4 miles/kWh of Tesla's Model S and other luxury sedans. Lucid stock was the best performing among automakers in 2021 mainly because it delivered on its major promises.

Lucid's initial range and horsepower projections for its Air Dream Edition were met with skepticism. But then the Environmental Protection Agency (EPA) rated the long-range version of the Air Dream Edition with a better-than-expected 520 miles of range and 933 horsepower, and the performance version of the Air Dream with an estimated range of 471 miles and 1,111 horsepower.

This stamp of approval was just one factor of many that made the industry take Lucid seriously. It has expanded its manufacturing capacity, has over 17,000 reservations for its Air line, and plans to expand capacity even further while rolling out lower-priced Air versions in 2022.

Like Lucid, Rivian has a large existing manufacturing capacity, plans to expand in the years ahead, and has strong demand for its vehicles. The company is looking to disrupt the electric van, truck, and SUV market. Although it began deliveries in the third quarter, the results came in lower than Rivian had guided for. However, a bright spot was that pre-orders for its R1T truck now stand at over 71,000, and that's on top of R1S reservations and the 100,000 delivery vans Amazon pre-ordered.

Rivian was awarded the Motor Trend 2022 Truck of the Year award and Lucid received the Motor Trend 2022 Car of the Year award. Investing in either company is a bet that their technology will hold up as new players enter the space, that they will grow production over time, and one day achieve consistent positive operating cash flow and profitably. It's a tall order, which is why both companies are some of the highest-risk options in the industry.

A dynasty far from decline

Despite the potential of companies like Lucid and Rivian, the idea that either is the "next Tesla" is doubtful. Tesla is the industry leader and is probably going to remain the most valuable automaker for decades to come.

Its invaluable first-mover advantage, incredible technology, and years making mistakes (and learning from them) have made it a battle-hardened veteran with one of the highest operating margins in the industry. Put another way, Tesla may not produce the most cars, but it does convert more revenue into actual profit than its competitors.

Its renewable energy and energy-storage segments are growing and also very profitable. In sum, betting against Tesla is a bad idea, especially if the company continues to retain its high profitability even as it grows revenue at a breakneck pace.

Less limelight, but lots of potential

The EV industry is so much more than new automakers or Tesla becoming even bigger. Lucid and Rivian will also have to compete against a crowd of legacy automakers backed by much larger workforces and capital. Make no mistake, these companies are not just going to sit idly by and watch newcomers gobble up market share that took them decades to build.

The legacy automaker that has arguably done the best job fostering real change is Ford (NYSE: F). It may surprise you to learn that Ford stock more than doubled in 2021, making it the second-best performing automaker behind Lucid for the year. Its new management team is keen on investing heavily into EVs to dominate the electric truck industry and compete in electric SUVs -- and it'll soon be making its own batteries and producing vehicles at its new mega factories in Tennessee and Kentucky.

Another way to invest in the EV industry is through infrastructure companies like ChargePoint (NYSE: CHPT), the largest Level 2 (240 volt) charging network in North America. It's quickly growing its Level 3 DC fast-charging network, and continues to look for ways to monetize its subscription business. Although ChargePoint's growth and path to profitability are attractive, some investors may prefer to go with a basket of EV charging stocks.

Zoom out and focus on the big picture

Real gains aren't made when a company beats a single quarter's estimates. Rather, they are made over the long term as new companies evolve into paradigm-shifting growth stories that go on to define an industry. That's exactly what Tesla did to the auto industry. And while there may never be another company quite like it, the auto industry has a very good chance of looking much different a decade from now than it does today.

An investor's task is to determine which companies have the best chance of succeeding and avoid those that aren't making the necessary capital commitments to prepare their businesses for the future.

It isn't hard to envision an EV stock like Lucid taking market share from today's leading luxury sedan makers. Or Rivian taking a chunk out of Jeep's business. Or Ford emerging from the shift from the internal combustion engine (ICE) to the electric motor with a tighter grasp on the global truck market. Or ChargePoint expanding its footprint across North America and Europe.

No matter how good a company's prospects look, the reality is that no one knows exactly which of them will emerge victorious, how long it will take for EVs to surpass ICE vehicles, or if other transportation fuels like compressed natural gas and hydrogen will also take large shares out of the commercial and passenger vehicle markets. Therefore, the best choice for most investors is probably to compile a basket of EV stocks. That way, diversification reduces risk without compromising the chance for upside if a single company proves to be a long-term winner.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Lucid, Rivian, and Tesla are just the tip of the EV stock iceberg appeared first on The Motley Fool Australia.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool owns and recommends Amazon, NIO Inc., and Tesla. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

There's a new cast list of electric vehicle (EV) contenders gunning for a slice of the auto industry pie. Among them are Rivian Automotive (NASDAQ: RIVN), Lucid Group (NASDAQ: LCID), and Nio (NYSE: NIO).

Since its initial public offering (IPO) on Nov. 10, share prices of Rivian have zoomed as high as $179.47 and as low as $95.20. In that same time frame, shares of Lucid blasted past $57 and then fell below the $40 threshold. 

With the dust somewhat settled, industry watchers now find Rivian, Lucid, and Nio all worth over $65 billion. Let's find out which electric car company has the best chance to become the next Tesla (NASDAQ: TSLA).

The technological edge

Lucid began deliveries of the long-range and performance versions of its Air Dream Edition luxury sedan in late October. But at a price tag of $169,000, it's hardly a viable option for most people.

However, Lucid's 17,000 reservations are scattered throughout the four trims of the Air, which is a good sign that there's demand for both Lucid's expensive and more "affordable" options. Lucid plans to use the $4.4 billion in cash it got from its merger with SPAC Churchill Capital IV in July to fund its 2022 operations -- which mainly consist of producing and delivering vehicles, expanding production capacity to 50,000 units per year, rolling out all four versions of the Lucid Air, and preparing to debut the Lucid Gravity SUV. 

Aside from a management team stacked with past experience at Tesla, Apple, and other major tech and financial firms, what Lucid has going for it more than anything else is some incredible battery technology that's built completely in-house. The Lucid Air was named the 2022 MotorTrend Car of the Year largely due to its over-500-mile range and over-1,100 horsepower. The efficiency of its battery pack should translate well to the lower-priced trims of the Air, as well as future models.

Carving out its own niche

Lucid may be crowned the king of range, but Rivian is doing everything it can to limit its competition and tap into what it thinks will be a ripe subsector of the EV market. Roughly a third of the company is owned by Amazon (20%) and Ford Motor Company (12%).

Like Lucid, Rivian's specs are impressive. The R1T has an estimated range of 314 miles and a towing capacity of 11,000 pounds. For comparison, the Ford F-150 Lightning has an estimated range of 230 miles (300 miles for the extended range version) and a towing capacity of around 10,000 pounds. But Rivian is hoping to distance itself from the competition as much as possible by tapping into the outdoor community. Rivian's brand image is like if REI and Jeep got together and made electric trucks and SUVs.

Flush with $12 billion in cash, Rivian has the makings of greatness. However, it is completely unproven as a public company. There's still a long laundry list of unchecked boxes that it needs to fill -- the first being sustaining mass customer deliveries. Until management proves it can efficiently allocate the capital it's been given, there are simply too many question marks facing Rivian at this time.

The value of volume

Before Lucid and Rivian hit the scene, it was Chinese electric car maker Nio that was getting the bulk of "FOMO" (fear of missing out) attention from EV investors. Unlike Lucid and Rivian, which have yet to achieve sizable deliveries, Nio delivered 10,628 vehicles in September alone, and has now delivered over 142,000 vehicles in total. By comparison, Lucid plans on delivering just 20,000 vehicles in 2022, and Rivian has about 55,000 reservations for its R1T truck and R1S SUV and has an annual production capacity of 150,000 units at its plant in Illinois. 

Nio has hit some supply chain snags, but the company is facing a lot of optimism on the way to Nio Day 2021 in mid-December. With a three-year advantage over Lucid and Rivian, Nio is a good bet for investors that value experience over potential.

The winner

Tesla's success stems from its technological edge. For that reason alone, the company that has the best chance to become the next Tesla could be Lucid.

What Lucid has done better than Nio or Rivian is stuck to its schedule. The company hit its production and delivery targets. Until it breaks that trend, there's reason to believe it can hit its 2022 goals, and beyond that, scale production while sustaining an over-20% gross margin (similar to Tesla). 

That being said, Lucid, Rivian, and Nio are several years away from even being considered the next Tesla. The best approach for most investors is probably to buy a basket of multiple EV stocks. It's a good way to protect yourself from steep losses in case one company fails, but also give yourself room for an investment to exponentially compound.

Another helpful practice is to follow the story as these EV newcomers mature. As with all young industries, new competition and developments could shift the dynamics on a dime. Staying up to date on industry happenings is the best way to ensure you're following the companies that have the best chance of becoming the next Tesla and not caught holdings shares of a company that's on a downward spiral. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Could Rivian, Lucid, or Nio become the next Tesla? appeared first on The Motley Fool Australia.

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Daniel Foelber owns shares of Lucid Group, Inc. and has the following options: short December 2021 $20 calls on Lucid Group, Inc., short February 2022 $20 calls on Lucid Group, Inc., and short November 2021 $22 calls on Lucid Group, Inc. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Amazon and Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

After reaching all-time highs on Nov. 10, leading cryptocurrencies Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH) are both down around 15% from their peaks.

Meanwhile, Cardano (CRYPTO: ADA) and Solana (CRYPTO: SOL) are down over 20% from their highs. Fears of an impending cryptocurrency winter and crackdowns by the U.S. and China may signal a short-term market top. Here's what to do if you're worried about falling cryptocurrency prices.

Bitcoin and Ethereum are not a bubble

Long gone are the days of calling Bitcoin and Ethereum a craze. Yes, many doubters remain, but there's no denying that Bitcoin and Ethereum are much more established than they used to be.

Bitcoin provides a store of value and an inflation hedge, especially in countries that lack a stable fiat currency. New financial products centered around Bitcoin are being introduced. Bitcoin is even being stored on companies' balance sheets. And most importantly, Bitcoin has remained safe and secure even as adoption has grown exponentially.

Meanwhile, Ethereum is the backbone of decentralized finance (DeFi). The growth of new applications that run on the Ethereum blockchain expands the importance of its network. One reason Bitcoin is so valuable is that it has a peak supply of just 21 million coins. Ethereum doesn't have a fixed supply, but coin-burning has successfully kept the asset scarce.

Ethereum is burned on purpose by those that try to limit its supply, as well as in transaction volumes for non-fungible tokens (NFTs) on sites like OpenSea. Without getting too much into the details, Ethereum has proven it is in fact scarce, which gives it more value and differentiates it from infinite-supply altcoins like Dogecoin or Shiba Inu.

The impending Ethereum 2.0 upgrade, which is expected in the first half of 2022, will transition Ethereum from a proof-of-work to a proof-of-stake consensus mechanism. In theory, the transition would make Ethereum more safe, secure, and scalable, not to mention less environmentally taxing. In a proof-of-stake method, users will validate transactions based on how many coins they hold, not by deploying computer power as is done in a proof-of-work method.

Distinguishing Bitcoin and Ethereum from altcoins

Bitcoin's unparalleled decentralization and safety make it a linchpin in the cryptocurrency market, whereas Ethereum is well-rounded and balanced -- acting like a smartphone that hosts innovative projects.

According to CoinMarketCap, there are over 14,500 cryptocurrencies currently in existence. Many of these projects will get hyped up, fail, and lose money for a lot of people. But it's important not to tangle fads and fringe markets in the Bitcoin and Ethereum investment thesis.

How to approach the market now

Whether you're new to the cryptocurrency market or wondering how to adjust your position amid falling prices, the most important thing is to respect your personal risk tolerance. Despite the potential, there's no reason to get overly involved in cryptocurrencies, especially the risky ones, if it doesn't suit you.

If you believe that we are in the early innings of decades of cryptocurrency growth, then simply dollar-cost averaging into Bitcoin and Ethereum over time should do the trick. If you want to expose yourself to other options as well, then adding a high-growth name like Solana is OK too.

Some risk-averse investors may even find the high interest rates offered by stablecoins providing an attractive income stream.

The cryptocurrency market is sure to go through cycles of boom and bust for the foreseeable future. But if you think the growth trajectory is headed up, then there's no reason to fear a short-term market top so long as the investment position is an amount you can afford to lose.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Did the Bitcoin and Ethereum bubble burst just signal a crypto market top? appeared first on The Motley Fool Australia.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Bitcoin and Ethereum. Daniel Foelber owns shares of Bitcoin, Cardano, and Ethereum. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Cathie Wood, the CEO of ARK Invest, is known for finding hypergrowth names with upside potential. The three largest holdings in ARK's six actively managed funds are Tesla, Square, and Teladoc. None of the three is cheap by traditional valuation metrics like price to sales (P/S) or price to earnings (P/E). But ARK believes that these companies, and others like them, will lead to a doubling of U.S. GDP to $40 trillion by 2035. 

By contrast, The Dow Jones Industrial Average (DJIA) will celebrate its 125^th anniversary on May 26. But while it's meant to reflect the entire U.S. economy, it doesn't exactly conjure an image of growth. In fact, the Nasdaq has given investors twice the return of the DJIA over the last five years.

Surprisingly, the four DJIA components that ARK owns -- Apple (NASDAQ: AAPL), Caterpillar (NYSE: CAT), Boeing (NYSE: BA), and Honeywell (NYSE: HON) -- are all relatively stable companies with histories of earnings growth, rather than up-and-coming rising stars. Here's why Cathie Wood likes these four Dow stocks, along with some surprising reasons she doesn't like a few others. 

1. Apple: $79.6 million

The ARK Fintech Innovation ETF (NYSEMKT: ARKF) owns 606,427 shares of Apple, which is worth nearly $80 million as of Apple's closing price on April 12. While this may sound like a lot, Apple is the fund's 24^th-largest holding and comprises less than 2% of its total value. ARK is a firm believer in mobile technology's increasing role in commerce, repeatedly noting the success of China's mobile payment system, so Apple's fintech developments like the Apple Card and Apple Pay make it a natural fit in ARK's Fintech ETF.

Augmented Reality (AR) is one of ARK's most closely followed trends. In its Big Ideas 2021 presentation, ARK called out Snapchat, Facebook, and Apple for increasing their investments in AR (all three companies are held in the Fintech Innovation ETF). ARK also supports Apple's decision to transition Macs to ARM processors. ARK believes ARM could become the new processor standard by 2030, displacing Intel and leading to further domination by AMD and NVIDIA. 

AAPL Total Return Level data by YCharts

2. Caterpillar: $75.6 million

Earth moving equipment manufacturer Caterpillar is the 15^th-largest holding in the ARK Autonomous Technology & Robotics ETF (NYSEMKT: ARKQ). After a strong market-beating year in 2020, shares of Caterpillar are currently right around their all-time high. In fact, Caterpillar is up over 25% so far in 2021, making it one of the best-performing stocks in the DJIA.

Caterpillar is an international company that generates over half its sales from outside the U.S. Global competition in the construction, mining, and energy industries is fierce, especially in China -- which is Caterpillar's hottest market. To stay ahead, Caterpillar is implementing machine learning and big data to help its customers better manage their fleets. Caterpillar has developed tools like Cat Connect and Cat Digital, which can be used for both existing and new equipment. 

3. Boeing: $22.5 million

Boeing is the 11^th-largest holding in the newly launched ARK Space Exploration & Innovation ETF (NYSEMKT: ARKX). As the world's second-largest maker of commercial airplanes and a leading aerospace company, Boeing has a clear role to play in the burgeoning space industry. Boeing's Defense, Space, and Security segment is a prime contractor for NASA's Space Launch System, a heavy-lift rocket for human space exploration. Boeing also builds satellites and software systems for commercial, military, and scientific exploration. 

4. Honeywell: $7.4 million

Honeywell is a minor holding, ranking 28^th in ARK's Space ETF. Honeywell manufactures and designs components for the commercial airline industry and the defense industry. However, its strides in the industrial internet of things (IIOT), which involves developing operational technology (OT) for industrial equipment, are right up ARK's alley. Honeywell would fit nicely into the ARK Innovation ETF (NYSEMKT: ARKK), the largest of its actively managed ETFs. But because the fund is centered almost entirely around tech stocks, that's unlikely to happen anytime soon.

Surprising Dow stocks ARK doesn't own

ARK's tech-centered focus may lead investors to assume it owns Salesforce and Microsoft, which are both Dow stocks. But it doesn't. The ARK Next Generation Internet ETF (NYSEMKT: ARKW) holds 53 securities, but not Verizon. And while five out of the DJIA's 30 components are financial companies, Ark's fintech fund holds none of them. Finally, the ARK Genomic Revolution Multi Sector ETF (NYSEMKT: ARKG) is focused heavily on healthcare, yet holds none of the DJIA's five healthcare stocks. 

Takeaways

Industrial stocks aren't often thought of as the most exciting sector on Wall Street. However, leading dividend-paying industrial stocks with growth potential have been handsomely rewarding investors for decades. Cathie Wood and her team think a handful of these names have bright futures in emerging industries. Honeywell and Caterpillar, in particular, stand out as two top-tier companies poised to raise their dividends and beat the market over the long term.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Cathie Wood's ARK Invest only owns 4 Dow stocks, and they aren't what you think appeared first on The Motley Fool Australia.

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Daniel Foelber has no position in any of the stocks mentioned. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Apple, Facebook, Microsoft, NVIDIA, Salesforce.com, Square, Teladoc Health, and Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Intel and Verizon Communications and recommends the following options: long January 2023 $57 calls on Intel, short March 2023 $130 calls on Apple, short January 2023 $57 puts on Intel, and long March 2023 $120 calls on Apple. The Motley Fool Australia has recommended Apple, Facebook, and NVIDIA. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.