As you probably know by now, GameStop (GME) is a struggling brick-and-mortar video game retailer.
It hasn’t turned a profit in any of the past six quarters, as more and more video gamers buy their games online.
But GME has been the target of a speculative frenzy from an army of regular investors inspired by the WallStreetBets Reddit community.
Take a look…
In January, GME soared 2,700%… before plunging 90% by early February.
Usually, after a washout like this… you don’t see speculators rush back in.
But starting in mid-February, GME soared again – by as much as 592%.
As the folks on WallStreetBets (WSB) say, “WSB YOLO.”
YOLO is internet-speak for “you only live once.” WSB YOLO has become a rallying cry for folks making big speculative bets inspired by WallStreetBets.
GME isn’t the only sign speculation is rife…
In Monday’s dispatch, we looked at this on a price-to-sales (P/S) basis.
This shows you how much stock market investors are willing to pay for each dollar of sales a company produces.
And right now, the P/S ratio for the S&P 500 is higher than it was at the height of the dot-com bubble in 1999.
The CAPE ratio is another valuation metric that’s flashing a warning.
It’s higher than it’s been at any time since the dot-com bubble.
CAPE stands for cyclically adjusted price-to-earnings. It compares today’s index level with average earnings over the past 10 years adjusted for inflation.
This helps smooth out the year-to-year swings in earnings that can throw off the regular price-to-earnings (P/E) ratio.
Today, the CAPE ratio for the S&P 500 stands at 35.2. It first broke that mark in March 1998… as the dot-com bubble was inflating, two years before its peak.
Remember, it’s easier to know what will happen in a bubble than when it will happen.
That is to say, you know the bubble will burst… but not precisely when.
As I showed you yesterday, even the smartest investors tend to call a crash years too early and miss out on the potentially life-changing gains on offer as the bubble continues to inflate.
So instead of trying to predict what will happen… you should prepare your portfolio for any market environment with an asset allocation plan.
It just means putting your investment “eggs” in different baskets.
I can’t emphasize strongly enough how critical this is to your long-term wealth.
Studies show that asset allocation – not the stocks you pick – accounts for more than 90% of a portfolio’s long-term returns.
The Wall Street version of asset allocation is a 60/40 split between stocks and bonds.
But as colleague Teeka Tiwari has been showing our Palm Beach Research Group readers… this model is outdated.
He says it’s better to include a wider range of assets in your portfolio. As well as stocks and bonds, he recommends real estate, pre-IPO shares, cryptos, precious metals, collectibles, and cash.
Teeka says his focus on asset allocation is the secret of the success of The Palm Beach Letter model portfolio.
We launched this advisory on April 13, 2011. Through 2020, the model portfolio averaged annual returns of 145%.
Over the same time, the average annual return for the S&P 500 was 14%. So you would have done more than 10x better with Teeka’s diversified approach.
I’ll give you an example of a simpler plan…
Last March, when stocks were tumbling, our editorial director at Legacy, Kris Sayce, dropped me a note. It was about the super simple asset allocation plan he follows.
He splits his portfolio three ways among stocks, cash, and gold. He says it’s a huge weight off his mind…
I know from looking at my portfolio my stocks are getting whacked. And they could continue to get whacked. But I’ve got only one-third of my portfolio in stocks. The other two-thirds is split evenly between cash and gold.
My stocks are down 15% or so from the peak. But it’s not a big deal. My gold has gone up. My cash hasn’t budged. So I’m not so worried. A 15% drawdown in my stocks translates into just a 5% drawdown in my portfolio. I can live with that.
There’s a reason Kris chose gold and cash along with the stocks he owns…
Regular readers know we think of physical gold – bars and coins – as “disaster insurance.”
It’s what investors run toward in a crash or panic.
Gold doesn’t pay income like a bond. It doesn’t have earnings like a stock. But crucially, it also doesn’t carry what Wall Street types call “counterparty risk.”
Unlike a stock or a bond, the value of your gold doesn’t depend on someone else’s promise to pay.
That’s why it’s been recognized as bedrock wealth for millennia. Folks turn to it as a safe haven in times of distress.
Just look at gold’s returns after the 2008 crash.
Gold dropped at first. But then it rallied 182% to a peak of $1,921 an ounce in September 2011.
Ballast is material you use to keep a ship steady in a storm.
Cash is the ballast that keeps your portfolio steady in a financial storm.
You can also think of cash as ammo. In a crash, it allows you to buy beaten-down stocks at bargain-basement prices.
Here’s one of my mentors, commodities speculator Rick Rule, with more on that…
The correct way to react to a crisis is to prepare for it for a very long time. For most of my adult life, I have maintained higher cash balances than most people. That is to say, more liquidity than many people deemed prudent. The consequence of which is that when a liquidity crisis or a crash happens, I have both the means (the cash) and the courage to take advantage of it rather than being taken advantage of.
That doesn’t mean you give up your quest for life-changing gains…
You want to play defense as well as offense… not instead of offense.
These are investments where the upside potential greatly outweighs the downside risk.
You need to put only a small amount down to see payoffs that can really move the needle on your wealth.
Good examples are the tiny cryptocurrencies Teeka recommends. He suggests his readers put no more than 2% of their liquid wealth in cryptos.
But in crypto, you don’t need large stakes to have a shot at life-changing wealth.
For example, last month, Teeka sent out more than a dozen sell alerts for cryptos he’s recommended at our crypto-focused advisory, Palm Beach Confidential.
He didn’t recommend his readers sell out of their positions entirely… because he still sees huge upside ahead.
Instead, he urged them to “scoop a little cream off the top” and take some profits.
Teeka recommended selling 30% of 13 individual crypto recommendations in the model portfolio.
The average gain across these 13 positions was 4,733%.
Top gainers were up as much as 561%… 1,682%… 1,716%… 17,613%… and 38,055%.
That last one is enough to turn every $1,000 stake into more than $380,000. (See the mailbag below for how Teeka’s subscribers reacted to these gains.)
It’s called the Coronavirus Crisis Playbook. My team and I put it together for you last March.
It’s a selection of the best wealth-protection insights from Teeka, Bill Bonner, Doug Casey, Dan Denning, Jason Bodner, Dave Forest, Nick Giambruno, and the rest of the Legacy Research team.
And it’s as relevant today as it was when we first shared it with you last year.
You’ll learn about the actions to take now to make your portfolio crash-resistant… how to make money as stocks fall… and a proven commodities system you can use to avoid having your wealth wiped out in the next crisis.
As a Daily Cut reader, you can access this playbook for free here.
March 11, 2021