A Confession

I’m not one of those permabears who have been hoarding gold since 1984, but lately I find myself getting so bearish I’m starting to scare myself.

In the last 18 months, I’ve gone from being 100% invested in tech stocks, to being 100% invested in beaten-down Dow stocks, to my current holdings, which consist of 70% cash and the rest in drug and gold stocks and a few other relatively safe issues.

How did this happen? It’s called discipline, or having a system and following it.

For starters, I was wildly bullish during the last economic crisis in 1997-1998. U.S. economic fundamentals were strong, and valuations, particularly in technology companies, were compelling. I loaded up on stocks like Cisco and Nokia and rode them to 700%-1,000% gains.

I sold them in early 2000 not because I expected a market crash, but because those stocks had exceeded the highest valuations I could place on them, and so my system dictated that I take profits. When all the good news is built into a stock, it’s gone about as far as it can go. There’s a famous story in which J.P. Morgan asked the head of a company how business was. When the company official said business couldn’t be any better, Morgan sold the company’s stock, because he figured all the good news was built into the stock price. That’s how investing works.

In February and March of 2000, I loaded up on beaten-down old economy stocks like Philip Morris because the valuations were compelling. MO at a PE of 6 when the S&P 500 was trading at a PE of 34 was a no-brainer. I haven’t seen a stock as undervalued as MO was at its low before or since.

And that’s part of the problem. A few stocks in the market represent fair values at their current prices – Boeing , United Technologies and Tyco are three – but there’s nothing undervalued, at least nothing that’s still growing. And that’s what works in the stock market – buying undervalued companies whose growth rates are still holding up.

My other problem with the market here is that the charts look terrible, both the major indexes and leading stocks, and sentiment is way too bullish. So why invest now when I think I can get better prices by waiting a while?

My biggest positions are in Merck , which I thought was a good value when it briefly dipped below 61, and two gold stocks, Gold Fields and Harmony Gold Mining . You’ve got to be invested at a level that you’re comfortable with, and right now that’s where my comfort zone is. Besides, gold is about the best-looking thing in the market right now, and institutional investors seem to be discovering it.

I’m not a Luddite, mind you. I’d be lost without my cable modem, and I launched an investing Web site back before the dot-com craze on the belief that online investing would radically change the investing landscape. It has, and it will continue to. The Internet revolution will still be going on years from now – once the pretenders are weeded from the survivors. There were about 400 car companies in the 1930s. The vast majority of them disappeared, but people didn’t stop buying cars.

But if you don’t have a discipline, you probably shouldn’t be doing your own investing. And right now mine is telling me that the way to play here is defense.

On the other hand, I’m due to be wrong. And I couldn’t imagine a better time than now.

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