The Market Looks Frothy: 3 Moves I'm Making In Response

As the market indexes hover near all-time highs, investors appear optimistic, as stocks tied to areas such as artificial intelligence (AI) continue moving higher.

Nonetheless, such moves may worry long-term investors. The Shiller price-to-earnings (P/E) ratio, which averages earnings over a 10-year period adjusted for inflation, is now at around 42. The only other time it reached that level was during the dot-com boom, and as many long-term investors know, that gave way to a dot-com bust.

That history has me concerned. Although I'm not giving up on the stock market, I'm making three moves that I think will protect me should the worst happen.

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1. Let winners keep winning

Leaving my highfliers alone may seem counterintuitive. I own AMD (NASDAQ: AMD), whose P/E ratio is over 140 at recent prices, and Shopify (NASDAQ: SHOP), whose P/E ratio is pushing 100 even amid concerns that AI threatens the business models of many software companies.

However, I still believe in the long-term theses of these underlying businesses. With regard to AMD, the company's growth prospects appear to support investors' enthusiasm, as its revenue growth rate closely approximates the 35% annual target over the next three years. In Shopify's case, it has built a nearly comprehensive e-commerce ecosystem. Thus, it will probably take more than an AI application to disrupt that business.

Moreover, history shows that holding to such beliefs over the long term. Perhaps one of the better examples is Amazon (NASDAQ: AMZN). Although it's up by almost 279,000% since its 1997 IPO, it lost more than 90% of its value during the dot-com bust before its comeback, bringing massive returns that more than make up for any failed investments.

Although enduring those sell-offs can be difficult emotionally, history shows that it pays to keep the faith in a solid investment thesis.

2. Stay liquid

Second, I'm keeping significant liquidity on hand. That includes cash and iShares Gold Trust (NYSEMKT: IAU), a gold-tracking stock that I hold as an inflation hedge and can convert to cash quickly.

Here I'm following the example of Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB). As Warren Buffett was getting ready to retire as CEO, he built a record liquidity position now topping $397 billion, more than the company's current $329 billion in reported holdings.

Buffett spoke of the virtues of buying in down markets. In such times, holding a massive liquidity position may mean that Berkshire, now run by Greg Abel, is gearing up for such an opportunity.

Assuming a downturn occurs, investors will be able to buy bear market stocks at a significant discount. Ultimately, we have no way of knowing when the next bear market will arrive or how severe it will be. That doesn't mean one will find Amazon selling at a 90% discount again, but a sell-off should make more of the market's top businesses trade at attractive prices.

More importantly, investors should remember that every previous bear market eventually ended. That positions long-term investors to benefit because the bear market occurred, and investors should probably position themselves to reap such rewards.

3. Seek bargains, always

Despite the high valuations, investors can find stocks to buy in this market. Many stocks don't move with the economy, so they can make great investments at the height of a bull market and could rise even as the overall market plunges.

For example, there's my contrarian take on Clorox (NYSE: CLX). I see it as a high-yield dividend stock with a cash return of around 5.6%, far above the 1.1% average for the S&P 500. It also has a history of annual payout increases, and its P/E ratio of 14 is less than half of the average 32 P/E ratio.

Admittedly, no individual stock is risk-free, and Clorox -- whose revenue has grown at an annualized rate around 2% over the past decade -- is not for everyone. Nonetheless, it serves as a reminder that investors should always be on the lookout for a buying opportunity.

Investing in today's market environment

The market is near record levels, and that leaves some investors wondering what to do. While history shows that bear markets happen eventually, we don't know how long the current bull market will continue.

However, an impending bear market is not a reason to give up on the stock market. As long as investors let winners win, hold some available cash, and always looks for opportunities, they can be in a position to win in the long term, no matter what happens next in the market.

Will Healy has positions in Advanced Micro Devices, Berkshire Hathaway, Clorox, Shopify, and iShares Gold Trust. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Berkshire Hathaway, and Shopify. The Motley Fool has a disclosure policy.