As we discussed on Tuesday, the dot-com era still has things to teach us 20 years later.
While history doesn’t always repeat itself, it does rhyme. Now that stock valuations are higher than they have ever been, and some pockets of the market are looking a bit frothy, the current investment environment feels eerily similar to the dot-com bubble of 1999-2000.
This isn’t necessarily an indicator that we’re approaching a “rhyme” of what happened in 2000, but it also does not mean that we are not.
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Because of this, today I’d like to show you how to perform a couple of simple portfolio tests that could help you prepare for any incoming market fluxes.
The Portfolio Test: Trimming, Patience, and Timing
We should take a few minutes to reexamine each of our investments to be sure that we are still enthusiastic about each of their prospects going forward.
At the same time, we should make sure that our total allocation to stocks aligns with our actual risk tolerance and investment objectives.
Run a simple test that goes like this: If a market selloff caused my stock holdings to fall 20%, would I be okay with it? What if my stocks fell 40%, would I be okay with that?
Another way to ask that same question would be: What would bother me more; missing out on a 30% gain… or suffering a 30% drawdown?
Only you know the answers to these questions, but given the market’s sky-high valuations, you should probably be asking them.
No matter what cautious steps you might take, some level of regret is almost inevitable.
If you trim positions and the market soars over the next 12 months, you might regret that you sold anything. On the other hand, even if you sold half of your holdings before a major selloff, you would probably regret not selling even more.
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There is no perfect, all-weather approach to managing risk; long-term investing is both a science and an art.
That’s why I recommend taking profits along the way, while still continuing to invest in the most promising investments you can find… no matter what the market environment might be.
Timing is important, but it isn’t the only determinant of investment success. Patience is also critical.
Richly valued stocks can inflict a lot of pain as they “deflate” during a bad bear market. That’s the bad news.
But there’s another side to this story, brought to us again by Kevin Landis.
Be Bold… Be Not Too Bold
Two years after dot-com peak, when Landis’s Firsthand Technology Value Fund was still nursing an 80% loss, he addressed a conference of professional investors and quoted the poet William Blake:
“If a fool would persist in his folly, he would be wise.”
In other words, many “foolish” ideas become brilliant… eventually.
Back in 1900, for example, Ferdinand Porsche designed and produce the first commercial all-electric automobile. Called the Lohner-Porsche Electromobile, he presented his innovation at the World Expo in Paris.
Part of the inventor’s motivation was his fear that the air we breathe was being “ruthlessly spoiled by the large number of petrol engines in use.”
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But the motorcar consumers of the early 1900s had no interest in such foolishness; they wanted gasoline-powered vehicles instead.
More than a century later, Elon Musk persisted in the folly of building all-electric cars, and investors have rewarded his company, Tesla (NASDAQ:TSLA), with a $1 trillion market value.
Even Landis’s own career makes the point that “foolish” ideas can become brilliant. The man is still at the helm of the Firsthand Technology Opportunities Fund, which has racked up a 2,000% gain from the lows of 2002.
Clearly, brilliance and foolishness share an intimate relationship. Sometimes the only factor dividing the two is the public attitude toward stocks.
So, what’s the takeaway from all this?
Investors should heed the famous line from Edmund Spenser’s Faerie Queene:
“Be bold… Be not too bold.”
In other words, be bold enough to buy and maintain positions in a select group of “forever stocks” that have the potential to deliver gains of 1,000% or more over time.
But do not be so bold that you hold an entire portfolio full of richly valued stocks that could implode during a serious bear market.
I talk more in depth about this in the most recent issue of Fry’s Investment Report. There, you’ll learn which stocks are on my radar this month — and even more about what to do as the “Tech Bubble 2.0” looms in the distance.
Regards,
Eric Fry
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On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.
