Caution is boring.
No guy ever rushed into a bar to wow his buddies with “crazy” stories about extreme acts of risk-avoidance.
But ironically, caution is often the prerequisite to thrills. Without cautiously packing a parachute, for example, no one ever seizes the thrill of jumping from an airplane (and surviving).
And without cautiously squirreling away cash from time to time, no one ever captures the excitement of investing in a high-flying stock.
But if you’ve been in the markets at all this past week, you’re probably feeling a sore spot.
Despite posting a phenomenal earnings report, NVIDIA Corp. (NVDA) sparked a significant selloff in tech that began on Wednesday – and spread widely across the market.
Traders feared that the artificial intelligence whirlwind of the past few months was overvalued, so they reacted with fear – and sold in droves. It’s the “good news is bad news” narrative we are all quite used to, but it stings nonetheless.
So today, let’s talk about what to do in a selloff… and why caution, while boring, is the best thing you can execute right now…
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Cash Is King
The question of what to do in a selloff is one I get quite often, and I’ll offer a two-part answer…
- Hold cash.
- Concentrate most of your investments in “megatrend” opportunities.
At first blush, the second part of my response may seem to conflict with the first. But I see these two parts as complementary components of a disciplined long-term strategy.
Let’s begin by examining cash.
Cash is the one and only reliable vaccine against capital loss.
Like all effective vaccines, it provides no visible therapeutic benefit. It doesn’t make your hair grow, improve your eyesight… or lower your golf handicap. It simply repels harm and preserves your financial health.
Cash is the one and only infallible hedge against loss. It is risk-free and inert – just hanging out waiting for an opportunity, like a baseball pinch-hitter.
And importantly, cash is the starting point of every successful investment. Without cash, every opportunity is a non-starter.
If you don’t have any, you won’t ever achieve investment success. That’s a cold, hard fact. And yet, most investors fail to appreciate the value of cash. They tend to think of it as “dead money” that yields nothing.
But that’s not true.
Cash is everything. You can’t buy a great stock with cash you don’t have.
Investors who commit all their cash to a random hodgepodge of investments will not have enough capital available when the truly exciting opportunities come along.
For this simple reason, I recommend maintaining significant cash levels at all times.
While true that cash will “underperform” stocks most of the time, cash “outperforms” stocks when you need it most… when stocks are falling. For this reason, cash is a helpful sleep aid… and also the fuel of future gains.
Megatrends Lead the Charge
Megatrend stocks often offer asymmetrical reward potential. A megatrend stock is one that draws its strength from an unusually powerful mid- to long-term trend (like AI).
The shares of a particular copper producer, for example, might draw strength from a powerful commodity bull market, also known as a commodity supercycle. We talked about this on Thursday.
The more powerful a megatrend might be, the more likely the stocks at the heart of that trend will produce explosive gains, even if the overall market is struggling.
Megatrend stocks do not automatically follow the stock market’s day-to-day price action; they produce their market-trouncing gains by charting an independent course that is not closely correlated with the S&P 500.
That’s why investing selectively in megatrends can increase the odds of success… even if your timing is less than perfect.
Stock market history has shown us repeatedly that stock market highs are rarely the best time to buy stocks… The investment gains that can accrue from buying into a megatrend at the worst time can be astonishing. The past few weeks should ring a bell…
Consider an example from the past.
Imagine, for instance, that you had purchased shares of Amazon.com Inc. (AMZN) on Oct. 23, 2007, at what was then the stock’s all-time high.
That investment would have produced a 100% gain within four years, 500% within eight years, 1,000% within 10 years… and a gain of more than 3,000% if you had continued holding those shares until today – or 11 times the return of the S&P 500 index over that time frame.
Admittedly, the path toward this grand investment success would not have been a straight line. Within one year of making this hypothetical purchase, your Amazon shares would have plummeted 65%… and two years after your purchase, you’d still be underwater.
In other words, your timing would have been less than ideal.
But if you had dumped your investment in this iconic company to save yourself some near-term pain, you would have missed the opportunity to capitalize on the online retailing megatrend that powered Amazon’s stock to such a spectacular long-term gain.
Obviously, I cherry-picked that success story. But you see my point.
And while a selloff like the one we’re in right now – on top of a few rough weeks – is difficult to weather, now may be the best time to buy stocks you’ve been waiting to add to your portfolio.
Maybe they aren’t trading at their 52-week lows, but maybe they’ve sunk below previous support levels and are within budget now.
Even though traders were spooked this week with NVDA’s nearly uncanny good news, that doesn’t mean that the momentum behind the AI megatrend has deteriorated at all – and in fact, it’s just as strong as ever.
The stocks that will power this megatrend are just “on sale” right now – even a few in the Investment Report portfolio.
And right now, I’m ready to reveal one of my top AI picks… for free.
Regards,
Eric
