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Playing Defense

At some point you have to stop buying dog shit stocks, specially stocks that look like bargains but are in fact overvalued grenades. Take Snap and GE for instance. They go up with the overall market and suddenly they look like a prom queen, which is an illusion because they actually carry a lot of risk (read THIS and THIS). In this market overpaying for stocks is a big no-no. What you want are established names with strong balance sheets and lots of cash. If they have a long and continuous history of dividend payments even better.

What about high quality growth stocks? It’s better to wait for a big correction. I want to own Salesforce (CRM), but at current levels the stock is too much of a risk. Growth stocks in general command a high price in relations to earnings, which makes them extremely vulnerable to market downturns. Take the software as a service sector (SaaS). A single headline can send a stock on a furious downward spiral. That’s because the sector attracts the most aggressive traders and these guys are prone to panics as they trade their way frantically from one stock to the next. When playing defense, it’s better to limit exposure to these stocks, or avoid them completely.

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