Last week, we talked about a concept I call “revenge investing.”
Riffing off of the “revenge travel” term folks have been using to refer to the travel boom following nearly two and half years of on-and-off COVID lockdowns, revenge investing adheres to the same idea…
The market has beaten us down for the last eight months, and frankly, investors are sick of losing money. Caution is certainly still the name of the game, but as Dave mentioned on Saturday, it’s time to get back to making serious money.
Obviously, I’m using the term “revenge investing” somewhat facetiously. By itself, it cannot halt a bear market in its tracks and power a new bull market.
But cash, coupled with a spirit of revenge investing, might be able to do just that… and there’s a lot of cash sitting on the sidelines at the moment – record levels, in fact…
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In the U.S. alone, money-market funds, checking accounts, and savings accounts hold a combined $21 trillion – or 50% more than they did four years ago.
Corporate balance sheets are also holding record-high cash levels. At last count, the world’s corporations were sitting on $6.8 trillion of cash and cash equivalents.
A lot of that cash is probably itching to get off the sidelines and into the game.
Certainly, the stock market is offering much better opportunities today than it was last fall, when stocks were hitting record highs and tech-focused fund managers like Cathie Wood were basking in their celebrity status.
Back then, I encouraged readers to raise cash by dumping some of the riskiest plays in the market. I wrote…
Today’s giddy stock market environment rhymes with 1999 as closely as “cat” rhymes with “hat.”
Stock valuations are hitting all-time highs – even surpassing the lofty levels of the dot.com peak of 2000.
And yet, investors of all sophistication levels are trotting out rationalizations for these high valuations. The higher prices soar, the more eagerly investors rationalize sky-high valuations.
For example, Cathie Wood recently [stated], “This is no bubble…I do believe that the market is beginning to understand how profound some of these platform opportunities are and how sustained and rapid the growth rates are going to be.”
In Wood’s view, today’s unprecedented tech innovation justifies higher company valuations. That’s because tech stocks can grow at such incredible rates that they render traditional valuation metrics irrelevant.
This bullish narrative is not the only financial phenomenon that rhymes with its 1999 counterparts. Some price trends are also rhyming… as the chart below shows.
During the past five years, the ARK Innovation ETF (ARKK) has traced out a price trajectory that has been eerily similar to the five-year price trajectory of Keven Landis’ Firsthand Technology Fund during the late 1990s…
[This] striking similarity does not automatically mean ARKK will begin plummeting like the Firsthand Fund did… [But] bad things often happen to richly valued stocks… and Ms. Wood has not shied away from loading her portfolios with pricey stocks.
In fact, the top 25 holdings in the ARK Innovation ETF are trading for infinity times earnings. That’s because the combined earnings of these companies are ZERO!
… Because stock market values today are higher than they have ever been, and because tech stock valuations are among the highest of the high, we investors owe it to ourselves to do a gut check.
We should take a few minutes to… 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…
As it turns out, raising cash was exactly what investors should have been doing back then. The Nasdaq Composite topped out just 10 days after I issued that cautionary message.
Accordingly, the ARKK Innovation ETFs did suffer the identical fate Firsthand Fund suffered two decades earlier. ARKK’s downward trajectory has mirrored the Firsthand Fund’s decline, almost tick for tick.
Shortly after I suggested raising cash, I recommended pivoting into one of the most despised and overlooked sectors of the stock market: energy.
Both of these calls – raising cash and buying energy stocks – ended up being on target. The energy play I recommended for my Investment Report readers last December has soared 50%, while the tech-heavy Nasdaq has slumped 19% since then.
To be clear, I am not boasting in any way. Despite these spot-on recommendations, several portfolio positions are showing minus signs… at least for the moment. The stock market has provided precious few hiding places during the last nine months.
But I don’t want to dwell on the tough times. Frankly, I’d much rather give you more reasons to open your brokerage statements again.
As such, I encourage you to check out an article I published earlier this month, 3 Undervalued Stocks on My Radar Right Now.
And if you’re feeling extra ambitious, I have three brand-new recommendations in Investment Report.
Each has outstanding long-term potential, and you can learn how to gain access to them by clicking here.
Regards,
Eric
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
