Kevin Duffy on investing during the Magnificent 7 bubble

We’re in a strange time because we’re in this Magnificent 7 bubble (witness the move in NVDA last week).  We’re also dealing with a lot of economic problems in the U.S. which are yet to be resolved, imo.  On top of that, retail investors are excited and margin debt is at precarious levels.  That tells me the opportunity set is likely to get a lot better sometime in the near future, i.e., I want to hold some cash and/or portfolio insurance so that I’m prepared (both financially and emotionally). 

At the same time, the opportunity set outside the Mag 7 bubble is exceptional.  This is typical of bubbles: they create anti-bubbles.  Stocks in China, Asia and emerging markets are a great example.  As bullish as retail investors are in the U.S., they’re just as bearish in China.  It’s practically a mirror image.  So I think it’s time to get aggressive in those areas.  I’d also add gold mining stocks (cheap!), energy/commodity stocks and a lot of small cap stocks in the U.S.  That’s the balancing act we’re trying to pull off as investors. 

On the one hand, investing is easy: just look for the best businesses at the best prices.  Don’t try to time the market, don’t hold too much cash.  Sell stocks when the crowd falls in love with them.  On the other hand, it’s a bit like 3-D chess.  Keep one eye on the retail investor.  If he’s all-in and excited, don’t be surprised if he gets disappointed at some point and panics.  Likewise, keep another eye on the economic picture.  That might be the catalyst that scares the retail investor.

~ Kevin Duffy, "Mailbag," The Coffee Can Portfolio, April 15, 2024