Walk On Hot Coals

      In 1973 Rory Gallagher recorded this song on his album "Blueprint". It contains a high energy guitar solo that I loved to listen to as a younger man. Few young people have ever even heard of Rory today, but his music lives on in my memory even though he died way too young. The song reminds me of the stock market environment today. I say this because the market is undergoing a rotation from some super high valuation growth names into some left behind value names. Only a few weeks ago stocks that represented the "stay at home" economy were the darlings on Wall Street but now their sky high valuations are being questioned. The reason is that with so many people who are now vaccinated, the stay at home economy may be slowly coming to an end. One sign of this is the volume of air travel which is approaching levels not seen since the pandemic started. This creates a very treacherous investing environment. Stocks like Netflix and Peloton have already started to slide downward because they were the beneficiaries of the lockdown. So what should an investor do? First, take baby steps when adjusting your portfolio. Making bold moves rarely ever paid-off for me. If you have nice gains in pandemic related stocks, it would be wise to take some money off the table. New money deployed into this market should be directed at the reopening of our economy, especially if the valuation (PE ratio) is below the rest of the market. Also never forget about dividends. Over the last 75 years, dividends have accounted for a large part of the overall return of stocks. I am not ready to turn tail and run from the stock market into fixed income like bonds or CD's. The reason is that yields are still so low that after the effect of inflation, you are guaranteed to lose purchasing power for your money. Stocks are still the only game in town but the game has changed a bit. I still like financials like banks, pharma, materials, and old tech companies that have not participated in the mania of the last 18 months. Pay attention to valuation, dividend yield, earnings growth and sales growth to keep from getting burned.

I HEARD IT THROUGH THE GRAPEVINE

      This song was without a doubt the biggest hit of Marvin Gaye's career. In 1967, Gaye recorded it on his "In the Groove" album which was released in 1968. Once radio DJ's began to play the single, it became a #1 on the Billboard Pop Single chart for seven weeks. Gladys Knight and the Pips also recorded "Grapevine" in 1968 but Gaye's version became the bigger hit and outsold all others. The grapevine or rumor mill is a great place to gather information about relationships and personal info about people but a terrible place to get investment advice. I bring this up because of the recent activity on the social media site Reddit. Young people who have absolutely no previous investment experience are openly touting stocks of questionable companies like Gamestop (GME) as promising investments. Gamestop is a video game retailer with about 5500 retail stores. Many young people have had a relationship with the company because they grew-up visiting the stores, testing new games and sometimes even buying them. They have an emotional connection with the company and now also with the stock, even though the business is in serious trouble due to internet sales, the pandemic, and changing consumer behavior. Admittedly, GME has seen volatile swings in price recently, creating profits for some and big losses for others. Some of the Reddit users still believe that they alone are causing this volatility in the stock but large institutional investors have joined in to benefit from the action. Buying a stock without doing any research is like making a bet on a roulette wheel, it seldom works out for the benefit of the bettor. With so many quality companies to choose from there is no reason to focus on one failing company. At some point, this memme stock fad will fade and GME will succumb to market forces based on fundamentals. It's OK to listen to rumors of great stocks but its not OK to buy on others recommendation alone. A little research will identify whether this stock is appropriate for your portfolio. Tools like ratio analysis, valuation comparison, debt analysis, and technical analysis will go a long way to help make the decision to pull the trigger. All these tools are discussed in earlier posts here on Moneylizard. I love the fact that so many young people are getting involved in stock investing but its disturbing that they are not performing any due diligence before buying. Finally, one should never buy or hold a stock for emotional reasons, its about the money.