Some portfolio allocation guidelines as the bubbles blow bigger
The bubble talk is bubbled as the markets and many stocks remain near their all-time highs. We’ve been having a huge discussion over on Scutify.com with our members about whether or not the markets and tech stocks in particular are “in a bubble” for days on end, and it’s clear that there’s big disagreement about just how wild this market has gotten. So are we in a bubble or not? Well, before we just jump in at the current levels to start debating about whether or not the markets are in a bubble, let’s take a look back at what I’ve said in past years about bubbles.
Back in August 2010, three years ago, I wrote an article called, “Your App Future“. I wrote in that article that “We’re likely to enter an ‘app bubble’ over the next couple/three years as the vision of this new app-centric future and its ability to impact every single facet of our lives even moreso than the World Wide Web has already. I’ll bet you that in two years, when dozens of app-related companies are coming public at wild valuations and there’s a frenzy among Fortune 500 companies to develop their app strategies and as we cross the one billion smartphone users threshold…well, I’ll bet the guy who wrote that to me calling me an idiot is gonna regret saying that apps have already peaked.”
And just a couple weeks before that I really laid out the vision of this current bubble-blowing bull market for app-related stocks, especially, in an article aptly titled, “How to bet big on the biggest market in history – apps“. And I wrote in it, that, “We’re lucky as investors that we’re not living through an app bubble…yet, anyway. Why not just embrace a five- or ten- year time horizon and figure out the best ways to invest your money, time and energy in a sector that can’t miss. That’s not even over-hyped (yet?). That’s going to entail at least a third of the entire population of the planet earth within the next decade as more than two billion people will become app-enabled smart-phone users. Google, Apple, Netflix and soon, Hulu, are all very likely going to be valued at much higher prices in five and ten years than they are today.”
Cody back in real-time here. So back to the discussion here today, are we now in a bubble? Well, it looks to me like it is playing out just about exactly how we expected it to. Betting big when the odds were in our favor has once again proven to be hugely profitable.
My own allocation breakdown isn’t relevant to you, per se because everybody’s needs, wants and risk-tolerance are different, but I had a lot of call options and common stock in many different App Revolution stocks back in 2010, and was more than 100% net long for a while. Fast forward to today, and I’d say being somewhere about 40-60% in net longs and call options vs. 10% broken biz model shorts; 5% bubble hedges (meaning right now that I am long puts on bubbled stock like $PCLN, $TSLA, $P), 5-10% in gold and silver coins and 2-3% in interest rate hedges and the rest in cash. The put options we own on $PCLN, $TSLA, $P, etc are supposed to be hedges. I don’t think it is wise to try to capture gains with these puts, per se, but if you have a balanced and net long portfolio with a lot of bubblicious stocks like I do, you want to have some puts to help in protecting your hard won capital!
Whether or not this current market is full of outright bubbled stocks that we’ll look back at one day and marvel at the valuations people were paying for Yelp and Zillow, two of the stocks that came public during this app revolution, isn’t the point. The point is that almost all of our stocks are trading at much higher levels and higher multiples on future earnings than they were back in 2010, and that means there’s inherently more risk in them now. So you reduce some of that risk and raise some cash and put on some hedges and wait for the next great set up when we can once again be confident about betting huge.
Easy does it for now as the bubbles blow bigger.
