by Simon Black
By July of last year, just three stocks (Amazon, Netflix and Microsoft) were responsible for 71% of the S&P 500’s returns.
Through the third quarter, tech stocks were responsible for 95% of the S&P’s gains.
And we long warned about the follies of blindly investing your capital into these incredibly popular and often overvalued firms (we also advised you to start raising cash).
Especially when a number of these companies were burning through cash at unprecedented rates…
Netflix LOST $3 billion in cash last year (and added another $4 billion in debt, bringing its total to over $10 billion). The company is currently trading at over 130x earnings.
Tesla – another market darling we questioned – was losing over $700 million in cash a quarter (though it recently turned cashflow positive). But the company recently had to lay off 10% of its workforce and cut the price of its Model 3 to attract demand.
Still, their share prices soared.
And that’s just the public markets. Venture capital investors were getting even wilder…
After a recent, $2 billion investment, WeWork, the shared office space company, is currently valued at $47 billion.
The company must be valued on “energy and spirituality” as Adam Neumann, the CEO said (he literally said that). Because the firm lost $723 million in the first half of 2018. And its bonds have already been downgraded to junk.
But it gets worse… news arose the company’s CEO was personally buying buildings and leasing them back to WeWork.
So while his investors are dumping billions into a cash-losing company, he’s buying real estate.
As if it wasn’t clear before, we know who Adam is looking out for – investors are not only footing the bill while he serves kombucha and free tequila to hipsters… they’re literally putting money in his pocket.
But in the fourth quarter of 2018, interest rates spiked. When you can earn more money in safer assets like cash and debt, blindly throwing cash at money-losing firms becomes less attractive.
And investors worried we may finally head towards a recession after a 10-year bull market in everything.
We saw the market’s growth engine (FAANG) tank…
It wasn’t just the high-flying floozies like Tesla and Netflix (which fell 24% and 44% from their peaks).
Huge, steady and profitable companies also plunged… Apple fell nearly 40% from its September highs. The company said it would stop publishing iPhone unit sales (it’s never reassuring when a company decides to get less transparent with investors).
And Facebook dropped by 43%.
Hundreds of billions of dollars in shareholder value were erased in just a few months.
The prices have recovered a bit from the recent lows. But the lesson is, these falls can happen faster and be more severe than anyone expects.
We saw some of the most popular and largest stocks in the world nearly get cut in half because the Federal Reserve raised interest rates by a few basis points.
What happens when we have a real reason to be worried?
Remember what happened in 2008. Millions of people got wiped out… they lost their retirement savings in a matter of months.
And the entire market could easily fall by 50% or more again. So you seriously need to ask yourself… what would you do in that scenario?
The key is to start thinking about this now, before the crash comes. Because in the heat of the moment, you’ll be panicked and emotional.
We believe things are in a general decline today. Nobody’s got a crystal ball, but last year, we predicted October would be the top. So far, that’s been the case.
Honestly, things could go up or down from here. So you’ve got to be well positioned no matter what does or doesn’t happen.
For now, you just need to be smarter and more conservative. If something’s not a screaming deal, then don’t do it.
In the meantime, look for some simple ways to safely earn more on your money.
If your cash is sitting in a bank and earning 0.05%, move it to Treasury bills and earn 2% more each year on your cash. There’s no downside to that.
I’ve also arranged several asset-backed loans for my Total Access members. We’re earning double-digit, annual interest on a loan backed by a piece of real estate worth multiples the loan amount.
Plus, I know the borrowers. They’re creditworthy and responsible.
But if they don’t pay, I already have custody of the asset, so there’s no legal process to taking the property over. That’s a pretty safe way to earn 12%.
I also invested in a startup a few years back… it was risky, but I knew the potential reward was massive.
The company, which is in the cannabis space, recently went public at about 50x where we initially invested. A number of our readers became millionaires…
Not bad for a 2.5 year investment period.
That’s why I like private companies. You can call up management on the phone and get the information you need to make a decision.
The point is, pay very close attention to your risks today – regardless of the investment. How much risk are you taking relative to the return?
Ten years in to the longest bull market in history, FAANG may not provide the best risk-adjusted returns.
But as individual investors, there’s a whole world of opportunities available to us that the larger, institutional players can’t access.
There are still deals out there. You just have to look a bit harder.