We have to understand that stock market underperformed I. 2022 simply because liquidity dried up, earnings and valuation compressed, investors piling into treasuries and also people are saving up cash in preparation for the likelihood of a recession.
What would I do if this is the case?
Relook at companies in your portfolio
With liquidity drying up, high cost of borrowing and earnings likely to drop if a recession takes place we have to face the fact that many companies that are unable to generate free cash flow, do not have large cash reserves or high cash burn rates won't be able to survive.
To avoid bankruptcy and high cost of borrowing, they are likely have to raise new capital by diluting shares of the company creating negative value for existing holders of the stock. This is especially so for companies with high cash burn rates and/or low cash reserve.
I might sell out of these positions to avoid taking onthese risks.
Built up cash reserve
It was not too long ago everyone think cash is trash but how the tables have turned, to take advantage of a market crash by purchasing great companies at a discount we need to have a large cash reserve.
One could find ways to built up cash reserve by getting a second income such as creating a side business, take on additional shift works and save up whenever possible.
Timing the market is hard, but that are signs we can look out for.
DCA is a great strategy, but in a bear market it is equivalent of catching falling knives and trust me the feeling is terrible.
Specifically to the current market, I will be looking out for signs of the FED pausing interest rate hikes or even hints of rate cut. The best time to DCA your cash into the stock market is when the FED start to reverse their hawkish stance.
Don't chase the wind
In the long term, equities always outperform bonds and commodities therefore I would not pile into bonds or commodities because of the current attractive yield or rise in prices unless you have a different time horizon or a different take in this view
Thoughts
Every recent rally eventually fades simply because we are in a contracting monetary environment. Holding companies with great fundamentals is more important now than ever, with earnings compressed many of these great companies are now at reasonable valuation.
I wouldn't jump in with all my cash right now scooping up these great companies and will instead stay at the sideline, waiting and analyzing the next and future inflation/jobs reports for signs of inflation clearing contained and also looking out for change in tone from the FED on their current polices.
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