 Good day, fellow investors. Why are stocks crashing? We have seen a 3% drop on Monday and it's proper to discuss what's going on from the short-term perspective and what's going on from the long-term perspective. I hope to give you value with this video so that you know how to position yourself in relation to your long-term goals. Let's see what happened. So here today the SAP 500 is not down much, just 3.43%, but this is a big deal after 2017 and stocks going up 20%. So the market is clearly looking for direction and that's why you see these spikes up and down one day 3% down the next day 2% up etc etc. So in the short-term the market is telling us I'm looking for direction. The momentum trades that have been going on in 2017 based on tax benefits, higher earnings thanks to that have been priced in the market and now the market is looking for okay what will push stocks higher because like it or not 95% of stock market investors now that are trading are looking for catalysts that will push stocks higher, not fundamentals. From the long-term perspective we always have Buffett and what we have to look at is his cash piling. So he started really piling cash from his usual level of around 40 billion in the first quarter of 2014 and now he is at 116 billion of cash on Berkshire's balance sheet. So let's first dig into the short-term perspective and then look at Buffett's long-term perspective and then you can choose which one you prefer. So stock market in 2017 went up 20% but then January was good. After January, February, March very very volatile what did we have? We had higher interest rates coming from the Fed. Free interest rates increases in 2018 with expected more increases in 2019. Higher interest rates mean only one thing for stocks and I'm going to let Buffett tell the story. Interest rates are to stock prices what gravity is to matter. I mean if interest rates were nothing and there were going to be nothing forever you'd be buying stuff that would yield you 1% or 2%. You might be buying real estate you might be buying stocks. If interest rates are on the short rate 21% like they were in 1982 under Voker you can look at a stock at 6 times earnings and you can say well that's really isn't that attractive. So interest rates I mean that's what drives valuations and we've had these very very low interest rates now for some time a lot longer than I thought we would have them and probably a lot longer than most people thought we'd have them. So if let's say interest rates rise then if you have a dividend yielding stock of 5% and now let's say a treasury goes to 5% that dividend yielding stock let's say you require a 10% return this means that the value of that stock when the yield goes from 5% to 10% drops 50% and that's how interest rates affect stocks asset prices real estate values whatever. Buffett knows that Buffett knew during the last 10 years that interest rates will have to go up are bound to go up sometimes in the future and he started preparing from that in 2014. So interest rates are one further we have had trade wars and now we have the regulatory scare surrounding social media stocks surrounding Amazon surrounding the monopoly surrounding internet whatever is let's say making the market jittery especially as the big tech companies are the biggest components of stock market indices which means that if one of those stocks moves then the index is impacted heavily so that's also skewed towards tech companies the index is. Now in this turmoil suddenly the two-year or the three-year or the five-year treasury seems much more attractive than stocks let me explain. So the two-year treasury yield went from 0.8% one and a half years ago to the current 2.3%. This means suddenly that the 2.3% are higher than the 1.8% dividend yield of the SAP 500. Those who were investing in stocks one and a half years ago looked okay stocks 1.8% two-year treasury 0.8% I prefer the dividend yield from stocks however now that stocks got volatile that there is a real probability for a stock market crash and drop now people say okay I prefer the 2.3 no risk treasury then the very risky 1.8 dividend yield from the SAP 500 when stocks could easily crash 5% in a day and 20-30% in a matter of months so that's the short-term risk reward and especially investors speculators are looking for catalysts that will push stocks higher in 2018 but there aren't any we can look at earnings growth but that's already been priced in so what is it there that will push stock prices higher the most likely thing that there is is a recession in 2019 and that's not something that pushes stock higher so the market is really let's say in a limbo now and we will see which trend will prevail will stocks continue to go up will they move sideways up and down with huge volatility which is excellent for day traders or the market will really go into correction and then bear market territory it will be interesting to follow to make things easier it's always best to have a long-term perspective on what's going on and let's see why Buffett stopped acquiring companies and stopped investing let's say in 2014 this is the EBITDA acquisition multiple for US companies and you can see that in 2013-12 it was around 8 below 8 then it spikes from 8 to 15 which means that suddenly acquiring companies became twice as expensive as it was in 2012 and what did Buffett do he said okay I'm not interested in paying 15 multiple for a company EBITDA multiple which means that the price earnings ratio is already a 25 which means a return of around 4% he says okay I'm going to wait it out because I know interest rates are going to get up if that happens in the next year good if it happens in five years good if it happens in 10 years Buffett will come again ahead of the majority of the market and that's how Buffett invests and that's how long-term investors invest they look at the business yield look at if it passes if it is below their threshold or above their threshold when it is above hiring business yield earnings yield then you buy and if you follow such a long-term perspective on the markets these short-term ups and downs don't really affect you you just deploy your capital when it's wise to do so and do nothing when it's not wise to do so or rebalance according so many will look at stocks and discuss okay how can stock market crash 3% in one day the economy is the same as it was last week and then we see a 3% one-day crash but even crazier is how can the stock market go up 64% in five years while the economy has been growing at an average of 2% per year so there is a clear divergence there and we will see will the economy catch up or will stocks catch up to the economy tomorrow I'll make a video about where are we now in the economic cycle and that's a video that will explain even better the long-term perspective on stocks and what Buffett has been waiting already for four years thank you for watching see you tomorrow in the economic cycle video looking forward to your comments please subscribe if you like the content click like and I thank you for watching