One of my favorite memes is the series of "in Soviet Russia" pictures that inevitably end with a verb being performed in reverse of the normal. So, in prior RM columns, I have jokingly thrown out the phrase "in Soviet Russia stocks buy you." As the market moved increasingly toward passive investing over the past decade, that is exactly what happened in Capitalist America. 401ks generally offer a limited group of funds from which to choose, and the managers of those funds were seemingly all buying the same stocks for the past 10 years, while IRAs became populated with ETFs, which pick stocks solely based on size. So, we just headed down this dusty road toward a Soviet-style asset allocation that was heavily weighted toward certain stocks -- Microsoft (MSFT) , Apple (AAPL) , Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) , Alphabet (GOOGL) (parent of Google.)
As the market takes a breather in Friday's trading from this week's incredible rally, I think the lesson we should have learned from the historic COVID-19 pullback in U.S equities is simple: there's no need to own stocks as a group and no need to crowd into widely-owned individual names.
So, as my city of New York suffers under the incredible strain of COVID-19, it's time to heed the advice of one of its most famous native sons. Teddy Roosevelt preached rugged individualism, and that's what you need here. Herd mentality is what brought us this wicked correction and the fastest move from bull market to bear market in the history of the U.S. Avoid the sheep and you'll be fine.
The simplest way to do this is to make your own decisions. Read as much as you can, especially from the crack team of columnists here at Real Money, but make your own decisions. This is not cliche, it's simply active management.
That may bring you right back to the MAFANGs, and if you arrive at a portfolio of those names based on your own volition, not the opaque maneuvers of some algorithm, I will not argue with you. Just make sure you are exercising your own judgment. Now that (seemingly) no one uses a stockbroker anymore, the advice of registered reps has been replaced by this weird, crowdsourced groupthink that has been terribly expensive. Ignore them. Delete Robinhood from your phone. The app did not work when you really needed it, anyway, with two appalling crashes during periods of heightened market volatility in the past month.
Stop trading and start investing. That ethos is what brought me to a portfolio of preferred stocks and corporate bonds that is so obscure that I have difficulty explaining it to folks. I am launching a new product to do just that but that doesn't make that style of investing any better or worse than just buying companies that provide goods or services that you use everyday.
I just happen to think the COVID-19 and its related governmental lockdowns will impact the cash flows of the household names more than the market is pricing in with the S&P 500 at 2,550. As I have stated in many RM columns, I believe fair value is 2,400 for the broad-based index (15x true earnings power of $160 per virtual S&P 500 share) and with the S&P plunging through 2,200 in Monday's trading, stocks were finally starting to look cheap to me. But bonds and preferreds were so incredibly mispriced that "cheap" wasn't one of the adjectives I was using. Some of those adjectives were profane, believe me, but locking in ridiculous prices is one modality that never fails in the markets, as long as you can accurately define ridiculous. That's what I did in this week's trading, and so far it has worked like a charm.
So, you can follow the herd, a strategy that worked incredibly well -- with a hiccup or two -- for the 2009-2019 time period, or you can use opportunistic buying and occasional bearish positioning (I use put options for this) to produce a very rudimentary market timing mechanism, a strategy that has worked incredibly well for the 1920-2020 time period.
I'm a market old-timer and still believe in rugged individualism, stock picking and calling market tops and bottoms. I don't think that would get me too many likes on the Robinhood message boards, but in Soviet Russia market corrections bankrupt you, and I was never a fan of those old bearded Slavic dudes, anyway.