Now is the time for caution
"Be fearful when others are greedy, and be greedy when others are fearful."
With the stock market hitting all time highs, which side of this spectrum do you think we are closer to? Interest rates will rise. Profit margins and earnings multiples will eventually decline. At some point we will have another recession.
"Price is what you pay; value is what you get."
Ben Graham, as told to Warren Buffett
The S&P 500 is up 24% this year. My portfolio is up 45%, and I'm sure many of yours are up substantially as well. Do you think that the value of your shares has risen as quickly as their price? NO!
"In all affairs it's a healthy thing now and then to hang a question mark on the things you have long taken for granted."
Improving the risk-reward profile of your investments should be a continuous process, but reducing risk is increasingly important as the market marches higher. There has never been a better time than right now to take an honest look at your investment assumptions.
You can reduce risk by lowering your equity exposure, moving towards higher quality stocks, or moving towards cheaper stocks. Find the biggest risks in your portfolio and find ways to reduce them.
"The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine."
How much cash flow and earnings do your companies generate? If they're not profitable (for example, cigar butts or growth stories), you better have a plan to get profitable or get out.
"Only when the tide goes out do you discover who's been swimming naked."
But losing substantial amounts of money is worse than being naked. It's more like getting eaten by a shark. If you aren't looking for the shark, you are in danger.