What You Can Learn about Smart Investing ... from a Pack of Sled Dogs!
One of my fondest memories as an investment analyst was attending and presenting on the 2016 Money, Metals & Mining Cruise. It gave me a chance to share my market views — and “talk shop” — with some of the savviest investors and analysts I’ve ever met face-to-face.
My wife and I were fortunate that it wasn’t all work and no play, however. We also got the chance to enjoy some beautiful scenery and experiences in Alaska, including visiting a sled dog training facility outside of Juneau. Here’s a photo of a team of huskies pulling us around on a wheeled sled there.
It was amazing to watch how the dogs worked together to achieve a common goal — getting that sled around the track. And in that effort is an important lesson for investors like you: A true bull market needs almost all sectors and stocks to pull in the same direction. When it’s just a handful leading the way, it leaves the market vulnerable to corrections — or even mini-crashes!
That’s my real problem with what I see happening today. I’m sure you know the acronym “FAANG,” right? It refers to the overhyped, over-owned and largely overvalued stocks you hear about on financial television all day, every day. Facebook (FB, Rated “B+”) is the “F” stock, followed by Apple (AAPL, Rated “B”), Amazon.com (AMZN, Rated “B-”), Netflix (NFLX, Rated “C”), and Google parent company Alphabet (GOOGL, Rated “B-”).
What you may NOT know is they’re pretty much the only game in town performance-wise!
The S&P 500 Index rose about 2.7% in the first half of 2018. But the five FAANG names accounted for ALL of that rise and then some. That’s according to Standard & Poor’s and BofA Merrill Lynch.
Specifically, the FAANGs contributed a 3.4% GAIN to the broader-market S&P 500 — while the entire rest of the index contributed a 0.7% LOSS.
Using a slightly different methodology and time frame, CNBC recently concluded that just THREE technology stocks — AMZN, NFLX and Microsoft (MSFT, Rated “A”) — generated 71% of the year-to-date returns in the S&P 500. Seven out of 11 market sectors actually LOST money in the first half of the year, with industrials (-5.6%), staples (-9.9%) and telecom (-10.8%) the biggest laggards.
No less than Larry Fink, the CEO of investment firm BlackRock (BLK, Rated “B+”), just said: “If you strip out a handful of outperforming tech stocks, the lack of breadth in the equity markets is troubling.”
His firm is the world’s largest money manager, with $6.3 trillion in assets under management. When he makes a statement like that, investors would be wise to listen.
My take? A market that can’t broaden out is a market you can’t really trust. While tech stocks and small caps have managed to make marginal new highs, everything from financials to transports to emerging market shares have not.
Moreover, when you have just a handful of stocks from the same exact sector dominating gains, “concentration risk” skyrockets. That means anything — from a slowdown in online advertising or subscription growth, to a significant government antitrust or data privacy push — could hurt not just one of these market leaders, but almost all of them … in one fell swoop!
We just saw NFLX stumble on Tuesday, for instance, after it whiffed badly on subscription additions. Then on Wednesday, GOOGL took a spill after the European Union’s antitrust regulator slapped a $5 billion fine on the search and mobile device company for abusing its market position. That was the largest fine the EU has EVER levied on ANY company!
Bottom line? This is a market with just a few dogs pulling its weight. If something happens to only a handful of stocks, it could send this whole market into a ditch.
So, rather than blindly following the masses and owning just a handful of overhyped stocks, I recommend you position your portfolio differently. Focus on defensive sectors like utilities, consumer staples and select REITs. Also maintain a much higher allocation to cash, and use tools like inverse ETFs to hedge or target downside profits in select sectors when appropriate.
More specific advice can be found in my July issue of the Weiss Ratings’ Safe Money Report, which just went to press last Friday. Click here to get your copy.
Until next time,
Mike Larson
