Falling Knives I'd Catch

Just because I think the market could be entering a dangerous period doesn’t mean I think investors should sit in cash forever.

This article will be just a reminder for some regular readers, but I thought today was a good day for it, given the ugly morning the market is having. This piece is a reminder that just because I think the market could be entering a dangerous period doesn’t mean I think investors should sit in cash forever.

If we get the kind of pullback/correction I have been warning about, I won’t be rushing to buy the names that led the bubble higher (AI, tech, crypto). Instead, I’d be slowly watching areas of the market where valuations are more reasonable, long-term secular tailwinds remain intact, or investor expectations have already been beaten down.

None of this is a call to go “all in” or expect this market will rebound anytime soon from its recent doldrums. It’s simply a list of where I think risk starts becoming more attractive if markets continue to deteriorate.

It’s a fair question. Being cautious doesn’t mean believing every stock should go to zero or refusing to own equities forever. It means understanding that price matters. It’s the reason I didn’t so much mind SpaceX’s bullshit vision as a company, but would never own it at this price…

In other words, a company can be a terrible investment at one valuation and a fantastic one a year later after sentiment has collapsed. That’s why I’m not so much interested in chasing whatever worked over the last two years. If my broader thesis plays out, leadership in the market is likely to shift. History says it usually does.

Whenever markets move from periods of speculation toward periods of caution, investors stop paying enormous premiums for distant promises and start rewarding cash flow, balance sheets, dividends, essential services and sectors where expectations had already been depressed. That doesn’t mean I’m predicting every one of these ideas will outperform. It simply means these are the sector-wide shopping lists I’d be watching while everyone else is panicking.

Let’s start with what I wouldn’t be buying.

If markets break down, I still believe the highest-risk areas remain much of AI, large-cap technology and many parts of crypto. The Mag 7 and hyperscalers will be the names people pull money out of to get more conservative with if we have an AI bubble pop. That doesn’t mean every company involved in artificial intelligence is worthless. Far from it. AI will absolutely transform industries over the coming decade.

The problem is that investors already know that. Many of today’s valuations assume years of flawless execution, endless capital spending and profit growth that leaves almost no room for disappointment. In other words, as I’ve been discussing since last December, the build out may have overshot the mark in AI.

I’d much rather let those multiples compress first than convince myself that paying any price is acceptable simply because something is exciting. But there’s one area of technology I’d actually look to add to first, before all the names we hear every day on CNBC.