Some say the market's a total bubble that will end badly for all. Others say stocks only go up and you have to get in. Still others only want to own the high-fliers and wouldn't dare touch the sleepy stocks that go up over time.
I say that this is precisely why I talk about -- okay, preach about -- the need to have a diversified portfolio. If you have read me or watched me over the years, you know that I believe diversification is the only free lunch and it's precisely this dilemma that it addresses.
We have seen many a hedge fund manager come on CNBC and warn people that this is the most dangerous time they have ever seen. I am not kidding. They actually use that hyperbole. Others who got in near the bottom and took advantage of no commissions to get long stocks have had a rude awakening when stocks had their fastest 10% decline ever. The combination of the vociferous nature of the decline and the jeremiads about the danger of stocks is toxic. How much better would it have been if the hedge fund masters had simply said be careful, be diversified and you can ride this out?
Now let's go over what diversification really means in this market. First, it means owning shares in an S&P 500 index fund. Perhaps you contribute over time, not all at once. But do it. Second, you want some stocks you like from a variety of industries that represent reasonable value versus their growth rate. I like, for example, Bristol-Meyers Squibb (BMY) , at 10x earnings and a 3% yield. Or Campbell Soup (CPB) , a bet that Covid has changed how we feel about going out versus dining at home. Again, cheap -- 3% yield -- well off its high. Perhaps one of the great retailers of our time -- a Costco (COST) , a Target (TGT) or a Walmart (WMT) -- would do. Maybe an industrial, a Dupont (DD) that's down on its luck RIGHT NOW, but won't stay that way.
Then there's the difficult part, the stocks that are overvalued on current earnings, or even sales, but might not be if everything goes right. This is where the real battles begin. I am suggesting that people own what can easily be described as a bubble stock, one that has been brought up through the Wall Street promotion machine, or cheered on by the Robinhood crowd, and is outrageously valued, perhaps because you think that the Fed is forcing people to buy stocks or because young people are oblivious to the risks out there.
I think Zoom (ZM) , for example, is attractive down 30% from its high. Others could react with horror about that choice. I think it is here to stay. I also am intrigued by CrowdStrike (CRWD) , which we had on Mad Money last night. It's got a remarkable growth rate, best of all the companies I follow. Or perhaps a LuluLemon (LULU) -- down hard today on a miss, but some of it is because of the crowding problem at its stores.
I use those as examples of what you could own if you wanted to, and would be fine with me -- provided you only owned one or two of them.
What makes me insistent that you try? How about FANG, which I began championing more than six years ago? How about Nvidia (NVDA) , which was expensive at the time I liked it, but became cheap because it delivered -- and then some. Or Shopify (SHOP) , which I liked at $100 -- it's at around $1000 now -- because it provided a way for individuals to start their own stores and empower themselves.
Or the big daddies -- Salesforce (CRM) , which I recommended at $8 -- and Apple (AAPL) -- own it, don't trade it, which I began pounding the table at $5. The management of these companies executed incredibly well and they made you fortunes doing so.
Now, of course there are going to be blow ups along the way, but that's why you only have one or two speculative stocks. And who knows, maybe they become blue chips, maybe they end up being established growth stocks.
And then there's the final tranche: cash. I like cash. If you don't have cash, are you borrowing money to buy stocks? I think you will get hurt. That's where the bubble callers are dead right. Borrowing money to buy all high fliers and moronic ETFs filled with the same growth stocks? You are going to end up unhappy. That's why I have been saying take something off the table. You need some cash for the end of this run and I am not sure that down 10% is it.
Is my method perfect? No. But mine allows you to capture some of the greatest wealth creation machine of all time.
What do others do? Keep you out or put you all in? Both have too much risk versus the diversified methods I believe in.