Ask Doc You've no doubt heard the saying, "What goes up must come down."
That might be true for gravity, but it's not true in financial markets.
While many cynics, skeptics, and permabears take a contrarian stance by saying that every bull market must reverse course and every rising stock must fall, the truth is that stocks do continue to go up.
These same naysayers reason that "trees don't grow to the sky." But stocks can.
See, the value of a stock can rise (or fall) via two paths. The first is a change in the intrinsic value of the underlying business. The second is a change in the current valuation or multiple assigned to that business.
Intrinsic value is the true value of an asset or business. It cannot be influenced by emotions or market sentiment. As wonderful as it would be, you can't just look this metric up on Bloomberg or Google... You have to divine it from financial metrics that vary by business or industry.
For most businesses, the intrinsic value comes from earnings. If the business is mature enough and profitable, you'd do even better by looking at free cash flow. For something like a bank, you would look at book value.
These measures can "grow to the sky"... or at least for as long as your entire investment lifetime.
They rely on strong management, the business's ability to create real value for customers and shareholders, and (most importantly) competitive advantage.
A stock's current valuation (or its multiple), on the other hand, relies on what famed economist John Maynard Keynes called "animal spirits" – the psychological and emotional factors that influence our decision-making.
Earnings can grow almost indefinitely, but you can't escape the limits of valuation for long.
To get rich as an investor, you should focus on the intrinsic value of a business... I've told readers this for years. You should only use current valuations and multiples to avoid mistakes.
Today, the animal spirits are tempting investors to overpay for stocks... And those same emotions will lead them to hold on for too long when those overvalued stocks fall.
Taking the emotion out of your investing is especially important during times of volatility... like we're predicting we'll see over the next several months.
Instead of sticking your head in the sand, you can use the next market move to your advantage...
According to my colleague and editor of Ten Stock Trader Greg Diamond, nothing opens up possibilities in the stock market like a presidential election does.
Greg says he isn't concerned with who wins the election. Instead of worrying, he's using a system that can profit from election-related volatility. His strategy isn't as conservative as mine... But Greg consistently manages big, quick gains by keeping his finger on the pulse of market trends.
Tuesday morning, Greg will go on camera to explain the "October surprise" we're headed for and how it could help you double your money.
Click here to reserve your spot today.
Now, let's dig into the Q&A... As always, keep sending your comments, questions, and topic suggestions to [email protected]. My team and I really do read every e-mail.
Q: I note Doc talks about having a good proportion of your portfolio as liquid cash. And I wonder what portion he means in percentage terms? Thanks. – A.W.
A: How much of your portfolio you keep in cash mostly depends on your age.
For a young person with 30 years to retirement, it's usually a mistake to keep a large chunk of your portfolio in cash. Set aside some cash for your emergency fund... and put the rest of your money into investments that will earn you a greater long-term return.
As you get closer to retirement, you should start moving some of your investments over to cash. You should start this phase five or 10 years before retirement. And you could gradually grow your cash allocation from, say, 5% to as high as 50%, depending on your goals. (As a general rule, an ideal asset allocation is around 25%.)
If you're thinking of retiring soon, you'd want significantly more cash. Or say we fall into a recession... In that scenario, you'd want enough extra cash to outlast the downturn so you don't have to sell assets at their lowest values.
And to be clear... when we say "cash," we don't mean actual dollar bills stacked up in your sock drawer. We mean money you can access quickly, with no loss of capital and little to no transaction fees... the money you can use to pay for things with no worry or hassle.
This category includes checking accounts, savings accounts, and a few short-term investment accounts. This cash makes up your emergency fund and the cash allocation of your portfolio.
As a Baby Boomer, I'm about as conservative an investor as it gets. I have a good chunk of my portfolio in cash and cash-like investments like Treasury securities.
Q: Any opinion on natto for vitamin K2 support? – A.O.
A: Natto – a Japanese dish with fermented soybeans – is definitely an acquired taste. The slimy texture is hard for some folks to overcome (although one of my researchers is a fan). But if you are willing to eat it, natto has tons of health benefits. It's packed with protein, manganese, iron, and vitamin K, just to name a few.
So if you enjoy eating natto, it's a healthy choice. For folks who can't stomach it, leafy greens like kale, collard greens, spinach, broccoli, and Brussels sprouts provide similar benefits.
What We're Reading...
- Did you miss it? Expect more division in our country.
- Something different: You were probably a victim of the latest massive data breach.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
August 23, 2024