First, let me say that I like this market. I like it even as it reversed today after the Dow hit 26,000. I liked it even when it was opening at record highs and went up huge in early morning trading even if there was little to justify the rally.
At the risk of sounding like Dr. Seuss, "I like This Rally, Sam I Am" -- and I'm about to say some things that people might not want to hear. Because if I don't keep saying: "I Like This Rally, Green Eggs and Ham," you will say, "I Do Not Like It, Sam I Am."
So now you know where I stand, but let me remind you of my rules of engagement with a bull market -- even one in beast mode:
Book Some Profits
First, remember the old saying: "No one ever got hurt taking a profit."
This saw is one of the oldest in the book, but I preach it constantly. Really disciplined portfolio managers know that you might think you have a gain when a stock you own is higher than the price you paid, but that isn't a real gain until you've sold.
So, you might be up huge on a position, say, in Amazon (AMZN) -- one of my favorite stocks -- but when multiple analysts raise their price targets all at once, you have an overheated situation. In that instance, there is absolutely no sin in taking a profit on some of your shares.
My staff and I talk about this kind of thing every day as part of the discussions involving my charitable trust. We literally talked last week about the possibility of taking some Facebook (FB) off of the table, but we didn't get a chance to formulate our theory. Instead, we just looked at the size of our position, how much it's up and how we weren't being sensitive enough to the idea that we haven't booked a profit in it lately and that it would be sinful to see a big U-turn in the stock. I don't expect one, but I do respect that CEO Mark Zuckerberg realizes that the flagship division might have to take some short-term pain in order to have long-term gain.
Now, I'm not picking on Facebook. There are literally hundreds of stocks with outsized gains, and I'm blessing the idea that no one ever got hurt taking a profit on Netflix (NFLX) , FedEx (FDX) or even my total fave Home Depot (HD) .
Ignore this rule at your own peril, although I'm not saying: "Take it all off." I like this market too much (and I like my green eggs and ham). I just don't want people to give back anything they've gained under the illusion that they already have a profit. You don't until it's taken.
Beware of Black Swans
Second rule: "You Don't Know When an Exogenous Event Might Strike."
I've been talking endlessly about how U.S. Commerce Secretary Wilbur Ross might soon recommend that President Trump invoke Rule 232, which empowers the government to protect domestic industries vital to our national defense.
The Chinese have been known to play a long-term diabolical game. What if they decided to wipe out our steel industry by selling steel below cost, then forcing us to use faulty Chinese steel in our tanks and howitzers?
Sure, I'm talking fiction right now -- in fact I don't want to be a plagiarist, so go order a copy of Ghost Fleet, a fictional novel about the next world war. It will take you weekend to read. It scared the heck out of me, and it might do the same to you.
Don't Be a Pig
Third rule: "Bulls Make Money, Bears Make Money and Pigs Get Slaughtered."
Do you really think you aren't being a tad greedy if you haven't sold anything? Now, I know that most of you are saving for retirement, and I don't want to encourage you to short-term trade in that kind of account.
I can't tell you when the market is going to go down, and I can't tell you when it's going to rally back. This isn't like 2007-08, when I was worried that people who needed money for retirement in the near future might lose a lot of it if they had to start taking it out.
The concerns I have are much more about an extended move, where you might be able to take a little something off now so you might be able to get back in at a lower price for anything but your retirement money.
It's so odd. If I were writing this column in the 1980s or the 1990s, people would know exactly what I mean. They would know that if they were saving money for retirement or owning stock because it was a good way to make money, this rule -- "Bulls Make Money, Bears Make Money, Pigs Get Slaughtered into Green Eggs and Ham" -- would resonate.
However, the conventional wisdom is that the only money that's in the market is for retirement, that it's in index funds for 401(k)s and that that's sacrosanct. You're only allowed to put money in, not take money out.
I no longer try to buck that convention. Instead, I'm simply saying that if you do have some money in a "mad-money" account, don't be a pig. Take some money off the table.
Don't Fall in Love with Any Stock
Rule No. 4: Stocks are just pieces of paper. Don't fall in love with them.
I've tried to explain this concept to the cryptomaniacs, but I don't want to be burned or hung in effigy. So, I'm suggesting that they do whatever they want with bitcoin. That's because mentioning the word "sell" and "bitcoin" in the same sentence (or even paragraph) is sacrilegious to them, and I'm a big First Amendment guy -- fighting for your right to be wrong.
But I will emphasize that with stocks, whenever I see things like "this is so easy" or "this is so much fun" -- the way I'm now reading in my Twitter file about people investing or trading or whatever people are thinking -- then you're being way too glib.
That kind of thinking is like a trap game in the NFL. Do you think that the Minnesota Vikings are thinking about coming to Philadelphia and playing the now-perennial-underdog Philadelphia Eagles?
Nah! Judging by their celebrations and their bravado, they've already figured they've beaten the Eagles and are ready to crush the New England Patriots (that is, if the Patriots actually get to the Big Game).
My advice: Stay humble like the Eagles, don't count your chickens before they hatch and don't fall in love with your own prowess (or the pieces of paper you are funneling through.)
Remember, it was also fun buying stock in the 1990s ... until 2000 -- when it became a game of musical chairs with just one remaining chair (named "Amazon").
Speaking of trap games, I have said over and over again: "Let's see what General Electric (GE) has to say before buying it up 6%." After Tuesday's news of an even-more-hideous loss in long-term-care insurance than most people were looking for -- I wasn't among them and had said many times to management that it was massively under-reserved -- I think it's worth the wait even if the company is going to be split up.
To me, GE is now an oil company with a decent health-care division, a good aerospace business and a power business that's probably going to suffer write-downs and layoffs that will look like the write-offs we experienced from the old Bethlehem Steel or the current abominable mess from Toshiba (TOSBF) .
Own Lots Stocks
Finally, Rule No. 5: Please stay diversified.
If you just owned the red-hot industrials, today hasn't been so hot. Same goes for the oils and retailers -- what goes up must come down (at least a little).
But even as the market had a major reversal today, the drug stocks and the health insurers had terrific runs. Johnson & Johnson (JNJ) , which was downgraded at $140 not long ago by a major house, is up huge today. Merck & Co. (MRK) had some solid evidence that Keytruda has had some real success against a particular kind of lung cancer -- propelling the stock much higher.
The Bottom Line
So, here's how I come out:
- Don't be greedy;
- Take some profits, which can't hurt you as you don't know what's going to come out from left field;
- Stay diversified, so that any sell-off can't take you apart.
Simple rules to live by. Don't screw it up.