"Sacrifice the candy for the ice cream"
I made up this saying a few days ago, and I will later explain how that saying applies to this newsletter's theme.
The week that was:
The main focus of this week's newsletter will be about the kind of stocks to buy in this market environment. To answer that question, it is important to identify what we know, and what we don't know.
What we know:
The first and most obvious thing is that we are in a bear market.
Inflation keeps going up
Supply chain problems remain
The Ukraine war rages on
Nasdaq stocks, particularly tech stocks, which are getting hit much worse
The Fed is not our friend, because they are raising the interest rates to destroy demand.
Demand destruction will decrease inflation, but too much demand destruction can also cause a recession. In past recessions, like the Covid pandemic in 2020, the Fed usually comes to the rescue and helps solve problems. In the Covid recession, the solution was giving free money to laid off workers. This time, there is nothing the Fed can do to solve these problems. In fact, they are making it worse.
What we do not know:
Some things I don't know are when inflation will decrease
When the Fed will lower interest rates
Whether there will be a recession or not
When the stock market bottom will be reached, and when the market will recover.
This is a complex and uncertain situation with no easy answers. Often the best solution is to keep things simple and stick to what we know. Dividend paying companies that make products or services that are essential or useful will hold up much better in this environment. Larger companies are able to handle inflation better than smaller companies. They also have fewer supply chain problems. Companies such as McDonalds and Domino's Pizza can be good buys. But McDonalds is trading at an all-time high whereas Dominos has corrected a lot. Hence I prefer Dominos.
A few words on tech stocks. In the current market environment, there are many good Nasdaq stocks that have gone down a lot that I can get at a good price. Stocks such as Amazon and Google are blue chip companies that are nearing attractive buying levels. Another great Nasdaq stock to own is Autodesk, because they don't have to worry about problems such as supply chain issues, so they won't be affected that much in this bear market.
It is important to have a diverse portfolio, and own safer, dividend paying stocks, along with Nasdaq stocks. Such stocks are Starbucks, Ross Stores, WDFC, and DPZ. They are good dividend paying companies with good growth, and in this market environment, they will hold up my portfolio. Even in a recession, people will be buying their products.
Coming back to the saying I mentioned in the beginning, I like both candy and ice cream. But ice cream is higher quality than candy. This week I sold my shares of Airbnb (ABNB) to buy Domino's Pizza (DPZ). ABNB is candy. It is a really good stock but is trading at a high valuation, and when I get the opportunity, I will buy shares of it again. However, DPZ is the ice cream and is the better stock to own in the current market. Candy is nice, but ice cream is even better.