“Cryptos today are like a game of pass the potato,” Marc Chaikin told me. “The thinking is, ‘If I buy this today, will someone else pay a higher price tomorrow?'”
Marc is actually a believer in cryptocurrencies like bitcoin. He just questions the price…
When any asset soars in price, it can reach a point where the idea behind it doesn’t matter. And that can lead to big falls like we’ve seen lately – first in ARK, and in the crypto market recently.
Yesterday, I shared some of what I learned when I spoke to Marc – a 50-year Wall Street veteran – last month. Today, I’ll share more of his insights on how to protect yourself from big potential busts…
In the crash from 1973 to 1974 – after what Marc called the “Go-Go Years” – the stock market’s big names fell as much as 90%. These names included Xerox, IBM, McDonald’s (MCD), and Kodak.
There was nothing wrong with them. They were just overpriced.
Marc used McDonald’s stock from back then as an example of what could happen to the big names riding today’s market fads…
“Between 1973 and 1979, McDonald’s shares went nowhere,” he said. “There was nothing wrong with McDonald’s. Earnings per share went from $1.20 a share to $4.80 in that time. The only issue was, McDonald’s shares were overpriced to start. So the stock went from around 75 times earnings to 9 times earnings from 1973 to 1979.
“I think you are going to start seeing that type of thing in today’s stocks, like Zoom and Fiverr. They are down about 35% since February. There’s nothing particularly wrong with their businesses. They were just overpriced. They could end up like McDonald’s in the 1970s.”
While the highly speculative stocks and cryptos have sold off lately, the overall markets haven’t buckled yet…
The benchmark stock index – the S&P 500 – fell from a peak of around 4,200 to a little less than 4,100 during its slide last month. That’s nothing. It’s like 1969 to 1970… not the crash of 1973.
We’ve even seen new highs since. So of course stocks can keep going higher.
Marc specifically pointed to the massive amounts of government spending and our current low-interest-rate environment as reasons why today’s asset boom can and likely will continue.
I agree. We’re already looking at $6 trillion in government stimulus (or more) since the crisis began. It’s an outrageous amount of stimulus for our economy – including continued $300 weekly unemployment checks going out to millions of Americans.
With such extreme government stimulus in place, businesses can keep doing better… and stock prices can keep going up.
But we still need to have a plan for the Melt Down. It’s a lesson Marc knows well…
“During the 1969 to 1970 bust, I realized I needed something else,” he told me.
Back then, Marc’s brokerage firm’s analysts would “like” a stock at $100… Then, they would “love it” even more at $75… And it was “the opportunity of a lifetime” at $50. Next, they would quietly “drop coverage” of the stock at $25 – which was terrible for Marc’s customers.
“Without something else, I couldn’t protect client assets and I couldn’t sleep at night,” he said. “So like you with trailing stops, I found an exit strategy to prevent catastrophic losses.”
Marc and I agree…
The most critical step you can take today to maximize your upside potential – and minimize your downside risk – has nothing to do with what assets you own.
From here through the Melt Down, the most critical thing you can do for your money is to have an exit strategy in place – and stick to it!
Good investing,
— Steve
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Source: Daily Wealth