Unsettling stats that remind us why we must diversify 😰

The odds of picking the next hot stock are not good 📉

Valuations were a hot topic on the podcast. (Source: The Compound / YouTube)

Mega-cap tech stocks, their surging valuations, and their role in investors’ portfolios are arguably the hottest topics in finance right now.

On Friday’s episode of “The Compound & Friends” podcast, Josh Brown, Michael Batnick, Jack Raines, and I spent about 40 minutes unpacking these issues. Here’s a lightly edited transcription of one of the exchanges:

Sam: Let’s say Apple is trading at 30X next year’s earnings. Well, 30 years from now, is it going to be the same level of earnings? You’re probably gonna be able to earn all that back in less time.

Michael: Well, analysts do it all the time. Like “This stock is trading at... maybe it’s 30x earnings today, but it’s trading at 22x 2030 earnings.” Or something like that.

Josh: That’s a dangerous game though.

Michael: Well, of course it is.

Sam: Oh, yeah.

Josh: If you had played that with previous dominant tech companies, you would be in Nokia. You’d be in Motorola. People forget that — maybe not as dominant as Apple and Microsoft today — there were other tech companies where analysts were playing that game thinking about 10 years out not understanding that pretty much everyone in history has gotten disrupted.

Sam: This is why you have to diversify, man.

Josh: I always say this.

I don’t want to put words in anyone’s mouth. But based on our conversation, I think we generally agree on four points:

1. Valuations can get very high, and it can be hard to explain why.

2. Few companies are able to deliver on earnings over time, justifying high valuations today and powering market-beating stock price returns.

3. Most companies fail to deliver on earnings over time, and their lagging stock prices will reflect it.

4. A diversified portfolio is one way to prudently get exposure to the handful of potential big winners while managing risk.

On that first point, I recently wrote a piece exploring why valuations can get high. Read it here.