How to Protect Yourself from a Dangerous Rally
Judging by the recent highs the market has been hitting, you’d think everything in the economic world was hunky-dory.
But that’s far from the truth.
The truth is that the market is rallying in the face of slower domestic growth, a slowdown in manufacturing, weaker corporate earnings, and a weak employment picture. In other words, there really isn’t a rational reason why the market should rise.
That’s not to say that the market doesn’t have a reason for its rally, even if it is a bad one.
You see, in the completely irrational opinion of the markets, the reason for going up is simple: They expect the U.S. economy to outperform nearly every other economy in the world.
Never mind the fact that the Fed is on the verge of raising interest rates despite the fact that the economy is on shaky footing — that would be a thought far too rational for the markets to comprehend. What will that do? Well, eventually it’s going to pull money away from stocks and move it towards bonds. That could propel a bond bubble ever higher … and when the music stops, all those bonds will be worthless.
Does that mean that the average investor is better off in stocks than bonds? Not in the least bit. All it means is that you need to pay close attention to the companies you invest in.
Take Google (Nasdaq: GOOG) for example.
Sure, Google is the No. 1 search engine in the world, but would you pay 25 times earnings to have a piece of them? Let me put this into perspective: Paying 25 times earnings for a company is like buying a company that makes $100,000 a year for $2.5 million dollars. At that price, it would take 25 years for your investment to finally break even!
And Google isn’t unique. There are companies all over the market which are now going at a huge premium to their true value. Why would anyone pay a premium for a company that could easily suffer during the oncoming economic slowdown?
No rational person would. And the fact is when the market starts heading south again, overpriced companies like Google will be the first ones to drop.
So how do you protect your portfolio during an economic slowdown? By buying into cheap companies that pay a steady dividend.
You see, the beauty of a cheap company is that they usually don’t get much cheaper. So while the Googles of the market are losing 25%, the cheap companies barely lose any value at all. In fact, most could gain. And the reason is very simple. Let me explain…
When consumers hear the word cheap, they think poor quality. But the cheap companies I’m talking about getting into are exactly the opposite.
These cheap companies have very strong balance sheets, provide steady dividends payments, and have global exposure that help shelter them from any slowdown in the U.S. economy.
And the best part is that a lot of these cheap companies have been growing for the last 20 to 30 years. In other words, they’ve been through all types of market crashes and crazy situations — and it only made them stronger.
So how do you get into these cheap companies? All you have to do is keep reading your monthly issues of Strategic Investment.
You see, I love getting involved with the cheapest companies on the market that have found a way to plug into the huge reservoir of global growth. In fact, if you look at our portfolio (which you can see here), you’ll find a plethora of just these kinds of stocks. Thirteen of our 16 holdings pay a dividend. And it’s these constantly increasing dividends that have helped us make a return, even when a given stock may trade flat.
But another great thing about these dividend stocks is this: They are better run than most other companies. Remember, in order to pay a dividend, a company has to be earning money and have a strong cash flow.
By ensuring a dividend gets paid every quarter, these companies take actions that enhance their cash flow and make them safer over the long-term.
The result is that you have a choice of companies that could keep churning cash for decades to come.
That’s how you protect yourself during a dangerous rally. I hope you take advantage.
Charles Del Valle
Editor, Strategic Investment