Imagine it's the 1980s, and you are Japanese......
You invest in Japanese stocks because those are the companies you understand, and it's hard to get information about foreign companies, and you don't want to take the currency risk. I won't tell you whether it's 1984 or 1989 because that would spoil the thought experiment. Imagine that you are smart enough to realize that asset prices have become disconnected from real worth. How do you invest?
One solution might be to go to cash. But there might be years of further asset inflation ahead, before the crash. You think about shorting the most absurdly overvalued stocks, the ones that are most hyped and at the highest PEs, but those are exactly the ones that keep on becoming even more absurdly overvalued. What do you do?
In retrospect, the correct strategy was to be very selective: buy the highest quality companies, the globally competitive multinationals (like Toyota). Buy only companies with pristine balance sheets and unassailable franchises. Buy only when the PE was at or below the expected growth rate. Sell as soon as the asset became overvalued, and search for whatever quality companies are still available at a reasonable price. Don't try to make money, don't do what the crowd is doing, ignore the most widely followed experts. Just try to avoid losing money, that's Rule Number One. Make sure there isn't too much air underneath the stocks you buy. Imagine the worst possible future, and ask. "can this company survive it?" If the answer is no, or even maybe, look elsewhere. Don't worry about diversifying, because by 1989 there will be very very very few companies that meet the above criteria.
OK. Imagine it's 1998, and you are American......What do you invest in? INTC? |
