What Is the Meaning of the Tech Stock Selloff?

A selloff in big tech stocks including the FAANG darlings has been repeatedly predicted for years. But, these money-making machines keeping going up in price as their earnings keep rising. After an initial scare at the beginning of the Covid-19 pandemic these companies saw higher stock prices as Covid-19 restrictions drove so much of our lives online. These companies have become what IBM and Phillip Morris once were, reliable investments that just seem to keep growing and growing.  So, what does the current tech stock selloff mean? Is the long-anticipated correction in the works? Is this just another “buy the dip” moment?

Why Is There a Tech Selloff Now?

Treasury Secretary Janet Yellen just said that a slight rise in interest rates may be necessary to stem inflation. Because low interest rates have been a major driver of the stock market it is a reasonable assumption that farsighted investors are rotating their portfolios out of high tech and into companies that serve the general economy. And, since no stock rally lasts forever, it was reasonable to expect corrections in tech from time to time. A long term underlying concern is that the government may decide to treat big tech companies like utilities because they are so basic and so central to the economy and our way of life. When companies like Amazon.com, Alphabet, Microsoft, and Facebook become so dominant in their market niches, antitrust concerns arise which could lead to the breaking up of some of these tech giants. All of that having been said, the market was probably just looking for a reason for a selloff and used Janet Yellen’s comments as an excuse.

When Will the Tech Selloff End?

This really is the question that investors want answered. Do these stocks have some sort of intrinsic weakness that has been ignored? Are their prices really beyond reason considering that they really are part of the technological backbone of the country? Investors who use intrinsic stock value as a guide will probably be buying the dip in the coming days. Their underlying assumption will be that these companies are central to our economy and will remain so well into the 21st century. These investors will consider a possible bump up in interest rates, how fast the economy will recover from the Covid-19 crisis, and whether or not Biden’s infrastructure proposal will come to fruition and drive both the creation of jobs and higher stock prices for years to come.

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Dividend stocks are a great way to invest over the long term. If you are going into retirement, the dividends are a nice quarterly source of income. And, as you prepare for retirement, dividend reinvestment plans let you roll your dividends back into more shares of stock without paying any commissions. But, not all dividend stocks are created equal! All too often, companies that are struggling maintain their dividend. The stock price is down and the dividend yield is fantastic. But, some of these high dividend yields are dangerous. One day the dividends will disappear just as the struggling company goes out of business! Here are a few of our thoughts on choosing the best dividend stocks.

Finding Dividend Stocks to Invest in

It is easy to find dividend stocks. But, rather than looking first for stocks on Yahoo Finance or Google Finance, go to a site like Dividend.com for a huge list of dividend stocks and Macy’s on page 22 paying a 9% + dividend. They are preceded by stocks that pay for more than 100% of the share price. When you see a stock like Macy’s that is having trouble competing in the brave new world of online sales and Amazon.com, you can understand why they are keeping their dividend up to attract investors even as sales and income fall. But, when a company is listed as paying more than the share price, something is drastically wrong. You should think twice before buying Macy’s for the dividend but when you see stocks with ridiculously high dividends, it is time to run and hide! So, how do you go about choosing the best dividend stocks that reward you for investing while also being safe over the long term?

Choosing the Best Dividend Stocks

There are just a few rules to follow in order to find the “goldilocks” group of dividend stocks that provide excellent returns and are secure over time. The process looks a lot like assessing intrinsic stock value when investing in stocks.

Investing in Dividend Stocks with a Large Margin of Safety

Some refer to this a looking for a strong operating mote. Whether this is a “high cost of entry” business like a natural gas pipeline that has overcome numerous obstacles to get built, a utility that is licensed to serve a specific region, or a world famous trade name like Coca Cola, companies that these competitive advantages are likely to be secure investments and dividend cash cows for year and years.

When Investing, Stay with Dividend Yields That Match Those of the Competition

This gets back to the business of avoiding companies that are struggling and don’t want to reduce their dividend for fear that it will alert investors as to their dire straits. A healthy business in any given sector will typically pay dividends in a given range. When the dividend is higher or lower than expected, you need to check that out before investing.

Understand and Check Out the Payout Ratio before Investing

This is similar to being leery of too-high dividends. A company will typically pay out a set portion of its income in dividends every year. The dividend goes up as they make more money and the dividend should go down when they go through difficult times. The market may not have caught on that a company is having trouble or doing better than expected, but if you follow their payout ratio, you will have a good idea. Then you can make an intelligent decision to buy more of the stock, hold what you have, or sell before the bottom falls out. Likewise, if you are putting your money in a stock and want to sleep well at night, you want a company whose balance sheet is healthy.

Investing Companies with Increasing Dividends

Companies that have been paying in dividends for decades or even more than a century have typically been increasing their dividend over the years. This is a sign of a healthy business, a good margin of safety, and intrinsic stock value. Picking stocks whose business plans you understand and who dividends go up every few years is a good way of choosing the best dividend stocks without spending too much time looking at the details!

Investments That Have Nothing to Do with China

CNBC was thinking along the same lines when they suggest that you should own stocks that have nothing to do with China. Three suggestions that they offer include Sherwin-Williams, Waste Connections, and Zoetis.

These picks make up an odd trio of companies in waste management, home construction, and animal health, but the strategy connecting them is: “You can own all sorts of names that are not related to the China deal that are still growing earnings 10 percent.”

The common factor with these investment options is that they all do business within the USA, are not dependent on materials or products imported from China or sales in foreign markets.

And, these stocks have other attractive features. For example, Sherwin-Williams barely noticed when the financial crisis occurred and the market crashed. And, its stock price has gone up from the $50 range to the $550 range since that time! Waste Connections is another stock that barely flinched during the 2008 market crash and has gone up from being a $13 stock in those days to a $90 stock today. Zoetis has only been listed for six years but has gone up from $33 a share to $120 a share during that time. And, it does not jump up and down with every innuendo in the trade war.

Investments That Will Detach Themselves from China

In our article about investing during a protracted trade war we noted that that the ABC (anywhere but China) movement is taking hold. As this advances, we will see more and more companies that are not dependent on China for their supply chains including raw materials and for their markets. This will add to your list of investments that have nothing to do with China but do have access to international markets.

The Many Different Kinds of Investments in Solar Energy

When investing in stocks in the solar market, you need to apply the same reasoning that you do for any of your investments. Are you investing for the long term? Are you more comfortable with large cap dividend stocks that do work in the solar energy area but have a broad base of products and services to guarantee those dividends for years to come? Or, do you like to find startups with the prospect of extraordinary growth? Whichever approach you take, you will need a company that stays ahead of the curve in this rapidly advancing investment arena.

Lots of companies are working in solar energy. Some are large companies for whom solar is a small percentage of the business and others are small companies totally devoted to solar. Large companies like Tesla, NextEra Energy, or AES Corp. are billion dollar companies with small-for-them solar exposure but still have more invested in and income from solar than smaller pure-play solar companies like Sunrun or Enphase Energy.
Here is a “baker’s dozen” list of companies trading on U.S. stock exchanges and working in the solar sector. They are listed by the size of their solar footprint.

• Tesla, $25 billion, solar panel installation
• NextEra Energy, $17.8 billion, utility
• The AES Corp., $10.6 billion, utility
• JinkoSolar Holding, $3.98 billion, solar panel manufacturing
• Brookfield Renewable Partners, $2.5 billion, solar panel manufacturing
• First Solar, $2.5 billion, solar panel manufacturing
• SunPower, $1.67 billion, solar panel manufacturing
• SolarEdge, $1.1 billion, solar panel and accessory manufacturing
• TerraForm Power, $940 million, utility-scale power production
• Sunrun, $844 million, installation of solar panels
• Enphase Energy, $404.5 million, manufactures solar components and accessories
• Vivint Solar, $301 million, solar panel installations

As you can see, there both large and small companies in this sector and companies that just manufacture panels, those that just install them, and utilities for whom solar is an increasingly large part of their operations.

Investments in Solar Panel Manufacturing

The two important things to know understand in this niche are solar panel efficiency and solar panel cost per watt of power produced. The technology is advancing and panels seem to get more efficient every year. However, end-users want the most power production for their dollar. Thus, cost per watt is commonly the driving factor in profitability. While the folks making the most efficient panels may get bragging rights, those that most-effectively produce panels that deliver the most electricity for the dollar will likely be the ones to survive and prosper. Solid fundamental analysis is important here and it needs to be repeated every time technology advances.  Largest players in this niche are JinkoSolar Holding, First Solar, SunPower, and SolarEdge.

Investments in Solar Panel Installation

To a degree this is a less chancy investment niche. These folks are not hurt by investment is manufacturing technology that become obsolete in a year. But, they need to constantly find customers, compete on price and service, and stay current with the technology. The biggest player in this niche is Tesla followed by Sunrun and Vivint Solar.

Investing in Solar Energy through Utilities

This sort of solar investment is one step further removed from the risks of advancing technology. Utilities tend to be secure investments and those that are the best run are the most successful. Utilities that make the best use of solar will be increasingly prosperous as the decades roll by. NextEra Energy and AES Corp. are the largest in this niche. The part of this sector that includes companies that just use solar for power generation bears watching. The one to watch in this case is TerraForm Power.

Best Investments in Solar Energy

The best investments in solar energy over the years will be those companies that use this advancing technology most effectively to generate long term, reliable profits. You will want to decide if you are going to “bet” on a pure manufacturing play, someone installs the panels, or the folks who generate power. Then you need to apply the same diligence that you use for every investment. What sort of debt does the company carry? How much cash does it routinely generate? Are its sales steady or always up and down? And, have they demonstrated the ability to stay ahead of the curve by adapting new technologies, efficiencies in their operations, and dominance of any particular part of the market? Are they, like the Coca Colas of the world, a household name?

Investment Risks of Holding Cash Include Loss of Interest Payments

When we pointed out that the Oracle of Omaha is sitting on a pile of cash, we do not mean that he is stuffing bills into a really huge mattress. From bank deposits, CDs, and money market accounts to short term bonds, there are many ways to hold cash, make a little money (even at today’s low interest rates) and have ready access to your money. When we wrote about how to invest without losing any money, we talked about how Federal Deposit Insurance now protects bank deposits. And, with bank CDs or Treasuries, you can set up “ladders” where money is always turning over and available for short-term needs. The rate of inflation is low today but it still eats away at the purchasing power of you hidden home cash. When investing in stocks, holding cash until you find the right investment is not a bad idea. And, when you will need your money for things like buying a house or sending a child to college, don’t stay in a risky market. But, over the long term, you are missing out on interest payments when you stash cash.

Investment Risks of Holding Cash Include Missing Out on the Next Market Rally

The reason that many investors are staying in the ever-older bull market is fear of missing out on the next big surge in prices. The rationales are that Trump will fix the trade war, earnings will continue to soar, and high employment will continue. Add a possible cut in interest rates to the picture and you can see why many folks are hesitant to get out of an ever-higher market.

The problem with this line of reasoning is just why long term successful investors like Buffett are holding so much money out of the stock market when they (Buffett especially) have described the US stock market as the best place for your long term investments.

The counter-argument is that folks like Buffett pick companies that will in all likelihood make strong and steady profits into the far distant future. With this idea in mind, they are willing to wait out a market downturn in the belief that that stock prices will recover and continue to climb. This approach was borne out when investors stayed with strong companies through the Financial Collapse and Great Recession.

The Investment Benefits of Holding Cash

When the markets melt down, cash is king. Time and time again, stocks and real estate have taken hits and folks with cash in hand have moved in and used the concept of intrinsic stock value to pick investments that are very cheap only to see their investments grow and prosper over the years.

We see no problem with holding cash so long as you have a plan for how to use it. But, don’t find yourself with hidden cash at home that loses its value slowly but surely as inflation eats away at it.

Investments for the Coming Recession

We start off with an article from The Motley Fool about stocks to buy during a market downturn. They suggest Berkshire Hathaway and CME Group. CME gets their nod because trading volume in futures and options always goes up during a bear market. This is not a bad idea for the short term. They pick Berkshire Hathaway because of Warren Buffett’s ability to find bargains in bear markets and then watch those investments recover and grow over the decades.

One of the many great things about Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) is that it tends to create tremendous value for its shareholders during periods of market distress. The mega-conglomerate is led by Warren Buffett, one of the most successful investors of all time.

Buffett excels at identifying mispriced assets, such as businesses that have temporarily fallen out of favor with investors. During bull markets, these opportunities are few and far between, but during bear markets, these profit opportunities are abundant. This is when Buffett is at his best.

We recently wrote about Buffett’s growing cash hoard as a silent warning for investors about the scarcity of good investment opportunities in today’s markets. But the truth of the matter is that Berkshire Hathaway will not stay out of stocks forever. Their favorite time to buy is when prices are depressed due to panic selling while long term growth prospects are good.

What Are Your Investments for the Coming Recession?

You do not have to be Warren Buffet to use intrinsic stock value as a guide to investing as he does. And, you do not have to buy stock in his company to follow the same approach. When choosing your investments for the coming recession, you can follow his approach which includes the following:

• Only invest in companies whose businesses you understand
• Don’t be disappointed if you end up throwing out 95% of the stocks you investigate
• Identify stocks that will have good cash flow going forward
• Identify a price at which buying those stocks will be profitable for the long term
• Pay attention as the market panics and many good stocks see their prices slashed
• Accumulate a pile of cash and be ready to buy when the time is right

And, if you think that wise investing during the coming recession will make Berkshire Hathaway more valuable, you might consider including them in your list of possible purchases. CME Group sounds like a good idea for the short term if you buy the argument that The Motley Fool makes. Utilities are usually a good bet when the economy weakens, but you need to get in before the market falls and not afterward.

We wrote recently about Disney as buy and hold investment. They have a business that is likely to grow over the years and will be rather recession-proof. The problem, in that case, is that the Disney stock price might not fall far enough to make it a wise purchase in your list of investments for the coming recession.

The best approach is to start with businesses that you understand and develop a short list of ones that have great long term prospects and whose stock prices will probably take a hit during a recession. Then start putting cash aside and wait for the inevitable.

What Are Investing Metrics and Why Should You Care?

As noted by Investopedia, investing metrics are quantitative measures used to assess current performance and predict future performance. The key to using metrics is choosing the right ones to watch and then learning how to read them. For example, the P/E ratio is generally considered one of the best ways for value investors to assess the value of one stock compared to others. Unfortunately, stock prices can be manipulated on a short term basis with stock buybacks. And, financial statements can be manipulated to make earnings appear greater than they really are. This does not mean that you should throw out the P/E ratio as a useful metric. Rather, it means that you should use more than one metric to assess your investments.

Investing Metrics You Should Pay Attention To

We write again and again on this site about using intrinsic value as a guide. This approach seeks to determine the forward-looking income stream of a company. Smart long term investors only invest in companies that have products and services they understand and a clear way that their business plan will make money for years to come. Success depends on the company, its products and services, and management. And, it depends on the economy. No matter how great a widget a company makes, it won’t make any profits if no one has the money to buy those widgets.

The Global Macro Monitor blog has some interesting comments in this regard in their post, How Far Can the Stock Market Run?

Our predisposition to the market is always anchored in time tested valuation metrics, which are hard to manipulate.  That is why we like market capitalization deflated by some macro variables, such as nominal GDP or wages.

Micro measures, such as Price-to-Earnings are way too distorted by buybacks and can be easily manipulated by CFOs, who play around with variables such as depreciation or loss reserves.

Our two favorite are 1) market cap-to-GDP, which, according to Warren Buffet is, “the best single measure of where valuations stand at any given moment.”   Take a look at the following chart and you will understand why the Oracle of Omaha is sitting on a record $122 billion stockpile of cash,  2) the number of hours of work needed to buy the S&P500, not a perfect valuation measure but does track our other favorite quite well.  The average person, making the average salary is not a big holder of stocks but the metric does give a heads up when the stock market becomes divorced from the underlying economic trend.

This is the first chart he refers to.

(Global Macro Monitor)

The commonly used micro investing metrics are these.

• Price to Earnings Ratio
• Price to Book Ratio
• Debt to Equity
• PEG Ratio
• Free Cash Flow

The commonly used macro investing metrics are these.

• GDP
• Market Cap to GDP Ratio
• Average Number of Work Hours Needed to Buy the S&P 500
• Bonds yields (e.g. inverted yield curve)

Using Investment Metrics

Micro metrics are useful in evaluating individual stocks. Macro metrics are useful when deciding when it is time to pull your investments out of the stock market and hold cash. Depending on the status of your macro investing metrics, you will choose to stay with your current investments or consider how to invest without losing any money by sticking with investments that will not crash when the market does.

Is Microsoft a Buy and Hold Investment?

One stock that looks good to analysts of tech stocks is Microsoft. According Market Watch, Microsoft looks like the safest bet among the software giants.

Sky-high valuations for software stocks necessitate a more defensive view of the industry, according to Jefferies analyst Brent Thill, and Microsoft Corp. shares look like the “safest” bet.

He assumed coverage of the software industry late on Monday, upgrading Microsoft’s stock to buy from hold while moving to the sidelines on several other names, including Oracle Corp. ORCL, -0.22% 
Microsoft MSFT, +0.36%  seems like a smart way to play software due to its diversified business makeup and clear visibility into double-digit revenue growth going forward, Thill wrote. He sees numerous growth drivers for Microsoft, including its Azure, Office, and LinkedIn businesses, which give the company the “greatest exposure to [software-as-a-service] revenue among any of the major public cloud players.”

Computer chips are getting faster and faster and artificial intelligence is already in play. But, in order to make money from these technologies, you need to invest in a company that finds real-world uses. Microsoft got started by developing the operating system for the IBM PC and all other compatible computers. And, over the years they have moved into gaming hardware and software, touch-screen computers, cloud-based computing and an ever-wider range of applications. It is this ability to read the needs of the market and both develop and market more and more useful applications that will provide Microsoft’s income stream into the future. Their intrinsic stock value is such that they are a “buy” right now and will likely remain so into the indefinite future.

Investing in Stocks in the Computer Technology Sector

Warren Buffett has famously avoided investing in advanced tech. His concern is that you cannot predict who the winners will be five years from now because technology changes so rapidly. And, investors should note Buffett’s silent warning for investors which we described in an article about how he is holding cash right now.

In this regard, is Microsoft a buy and hold investment? However, Microsoft makes money by finding applications for technologies, making businesses run better, and making communication more efficient. These are services that people will pay for now and for a long time to come. The company is not necessarily where you want to put all of your money, but can easily be part of anyone’s portfolio of buy and hold stocks. And, if you like the idea of investing and not losing any money, Microsoft (along with Johnson & Johnson) has the only American AAA corporate bonds. Learn more about MSFT stock Nasdaq at this link.

As noted in a recent CNN business article, investors are “holding their noses” and buying stocks because “there is no alternative.”

TINA (There Is No Alternative) has become a popular mantra on Wall Street. It explains why stocks are near record highs despite concerns about trade tensions with China and what’s expected to be another round of lackluster corporate earnings next month.

Not even a huge surge in crude prices Monday following an attack on Saudi oil facilities over the weekend was enough to dampen investor enthusiasm all that much. The Dow fell a little more than 150 points, or about 0.6%, Monday. That’s a pretty tame drop, especially when you consider that the blue chip average had gained for the prior eight trading days.

It appears that investors are holding their noses and buying stocks because of the TINA trade. With the Federal Reserve expected to cut short-term interest rates again at its meeting this week, stocks could get another boost.

We recently wrote about investment risks related to the inverted yield curve. While an inverted yield curve is a reliable predictor of a coming recession and market correction or crash, it also tells bond investors that interest rates on bonds will remain low for years to come. While the prospect of lower interest rates for years to come makes bond investing seem less attractive to many investors it also makes stocks more attractive to others. For those who see stocks and bonds as their only investment choices, the TINA (There Is No Alternative) view to investing makes sense. However, from our viewpoint, this is a short-sighted defensive posture that is full of risk.

What Are Your Investment Alternatives?

When many folks think of investing, they think of stocks, bonds, and cash. There are alternatives. Some are so-called alternative investments like real estate, commodities, derivatives contracts, managed futures, hedge funds, and arts/antiquities. When choosing alternative investments, the same principles of intrinsic value should be applied to make your choices as to investing in stocks. Other “investments” that make a lot of sense are paying down your credit card balance or paying ahead on your mortgage if you have a locked-in high rate.

Real Estate Investments

Your first real estate investment should be your home. The mortgage interest rate deduction makes this an attractive investment for anyone. And, over the years, you will not only pay less on your mortgage than if you are paying rent but will also have a home to live in free and clear of debt in the end. For most Americans, their home is their greatest financial asset when they reach retirement.

Second homes can be a good real estate investment as well. However, recent changes in the tax law have taken away the mortgage interest deduction on second homes. Thus, any investment in a second home, vacation home, other property will need to stand on its own merits.

Alternative Investments in REITs

According to Investopedia, REITs (Real Estate Investment Trusts) allow investors to “buy shares in commercial real estate portfolios.” They then receive income from a collection of properties such as apartment complexes, health care facilities, hotels, data centers, energy pipelines, cell towers, warehouses, and even timberland. There are equity REITs, mortgage REITs, and hybrid REITs. The Investopedia article has useful descriptions of each of these alternative investments.

Commodity Investing: Gold

Unless you have the background and expertise to predict changes in the live cattle, pork belly, wheat, corn, or soybean markets, these investments are best left to the folks with the skills, experience, and resources to do this sort of trading. However, many investors choose to invest in gold as a hedge against inflation or as a bet on the market taking a downturn. Some investors choose to purchase gold bullion as bars or coins and store the gold themselves in a safe deposit box. Those who choose to purchase substantial quantities can find insured gold deposit facilities. Gold mining stocks often go up in value faster than gold in a bull market and Gold ETFs allow one to participate in an upward swing of gold and get out in a timely manner. We have written at length about the benefits and risks of long term gold investing.

Hedge Funds as Alternative Investments

Hedge funds attempt to multiply the profits of normal market movements through “hedging” strategies like holding both long and short positions in markets. These alternative investments are commonly in stocks. When you invest in a hedge fund you trust the skill and timing of the fund operators to make you a profit in excess of what your own market investing would provide.

Practical Investment Alternatives to Today’s Stock and Bond Markets

There are basic and safe ways to invest outside of the stock market and bond market and there are risky ways. Paying down your credit cards, paying ahead on your home mortgage, or investing in a well-managed REIT are practical ways to invest outside of the stock market. If you have money that you want to invest for the long term and are willing to wait, practical alternatives include US farmland and offshore investments in developing economies.

And, many smart long term investors are perfectly happy with investments that do not lose any money, such as long term bonds, Treasuries, and CDs at your local bank. This may not be a bad approach when you are unsure where the stock market is headed and if another Financial Crisis is around the corner!

What Is an Inverted Yield Curve?

Investopedia discusses the inverted yield curve.

An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.

Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle. A recent example is when the U.S. Treasury yield curve inverted in late 2005, 2006, and again in 2007 before U.S. equity markets collapsed.

Normally, bond investors demand a higher interest rate for locking up their money in a fixed-rate instrument for longer periods of time. Right now they are willing to purchase five, ten, and even thirty-year Treasuries at lower rates of interest. This means that these folks believe that interest rates will be lower in the future and will stay low for a long time. If the economy tanks along with the US stock market, the Federal Reserve will most-likely lower interest rates.

Japan: An Example of Long-Term Low Interest Rates

Normally, we would not think that rates in a major economy would remain low for years or even decades. But, one only needs to look at Japan. In the 1970s and 1980s, during Japan’s boom times, rates ran between 4% and 9%. By the late 1990s, their rates ran between 1% and 0% with brief periods of negative interest rates. (Trading Economics)

Will Inverted Bond Yields Cause Your Investments to Crash?

The first part of this question has to do with how often inverted yields have preceded a market crash and/or recession and by how many years. Is this really a reliable indicator?

Accuracy of Inverted Yields as an Indicator of Recession and Market Correction

Reuters writes that this is a countdown to recession.

The U.S. curve has inverted before each recession in the past 50 years. It offered a false signal just once in that time.

So, this is a pretty reliable indicator that economic troubles are ahead. But, how long will it take after yields invert before the economy and stock market tank? The yield curve inverted in 2005 and again in 2007. Although the 2007 yield curve inversion immediately preceded the Financial Crisis, the 2005 inversion preceded it by slightly more than two years. The thing to avoid here is to believe that the 2005 inversion was a “false alarm.” Long term bond investors are a cautious group. As such, they may sniff out economic trouble and make smart decisions with their bond purchases while everyone else is happy buying into a market that is ready to correct or crash. These folks are using the same sort of approach as with applying intrinsic stock value to their stock purchases. Is should be noted that before the dot com crash that Warren Buffet pulled lots of money out of the stock market because he said did not make sense. And today, he is doing the same as we noted in our article, Silent Warning for Investors.

Will Your Investments Survive a Recession and Stock Market Crash?

This is really what the inverted yield curve issue is all about. Last year we wrote about how to invest without losing any money. The argument we made in that article is that part of your investment portfolio should be in vehicles like US Treasuries, AAA corporate bonds, and bank CDS that are protected by Federal Deposit Insurance. In this part of your portfolio, you will forego growth in favor of safety. And, if today’s inverted yields are an accurate indicator of a coming recession and crash, this part of your investments will be protected against devastating loss.

That having been said, are there ways to keep a foot in the market and protect your investments?

Using Stock Options to Protect Your Stock Investments

Last year we wrote about how to use options to protect your investment portfolio. Our suggestion was to consider buying put options on stocks that you believe are in danger of a correction but still have some room to run.

Market Watch also mentioned buying puts in an article about four ways to protect your stock portfolio using options.

When you buy puts, you will profit when a stock drops in value. For example, before the 2008 crash, your puts would have gone up in value as your stocks went down. Put options grant their owners the right to sell 100 shares of stock at the strike price. Although puts don’t necessarily provide 100 percent protection, they can reduce loss. It’s similar to buying an insurance policy with a deductible. Unlike shorting stocks, where losses can be unlimited, with puts the most you can lose is what you paid for the put.

This can be a very effective strategy for those who know how to use it. That includes picking the right strike prices and options expiration dates. Successful use of this approach also includes knowing when to use it and when to avoid the repeated expense of buying new put options when the old ones expire.