05/04/2009 05:12 am ET Updated May 25, 2011

Keep the Baby -- Throw Out the Bathwater

Those of you who are waiting for the economy to get "back" to normal will probably be waiting for the rest of your lives. We are getting to the new normal on a daily basis but it will bear little resemblance to what passed for normal over the last 20 years.

During the first quarter, the stock and bond market averages all lost ground. But unlike the previous quarter when every imaginable asset class was hammered, this time there were some clear winners and some equally clear losers. We were given a pretty clear road map to the future and what the new normal will look like.

Things are actually playing out pretty much the way I predicted in an article two months ago (It's Time To Buy Stocks and Stuff). If that sounds a little self-serving, I can't help it. It's been so long since I've made money for people that I have to let it out.

I have been saying that it's not time to be bullish and it's not time to be bearish. It's time to be smart. The economic crisis combined with the forced hedge and mutual fund liquidations to smash prices of a variety of companies and asset types. That led to widespread panic on the part of retail investors that peaked three weeks ago.

As a result, a variety of good companies and stuff (energy, gold, industrial materials) got very cheap and super safe investments -- particularly long-term U.S. treasuries got very expensive.

The smart strategy is to buy the stocks and stuff that are cheap and sell the super-safe investments that are expensive. That, of course, is after you set aside all the cash you are going to need during the next two years from your investments plus whatever additional amount you need set aside to keep you from panicking during a downturn.

Stuff went up in value during the first quarter. Oil, gold, and a variety of industrial materials appreciated nicely. Given the trillions of dollars that we will have to print to keep the economy and financial system from imploding further, it makes sense to own hard assets for the future. When the current glut of supply is relieved -- which could take a while -- that will apply to real estate as well because replacement costs will be going up a lot.

President Obama has been sharply criticized by Republicans for the trillions of dollars in deficits his budgets will cause. But the Republican alternative just released calls for almost $2 trillion in deficits this year alone. At the end of the day, it will cost us trillions that we don't have to get out of this mess regardless of which party has its way. Sooner or later, it will require more pieces of paper (dollars or any other currency) to buy stuff.

So that's one investment theme.

The other is that when companies and consumers emerge from the paralysis that has set in, they will start spending money again because they have to. That may have already started to happen. Recent data show that people still feel scared but they are actually spending more money.

But we have been so profoundly impacted by the sudden vaporization of wealth the we will think very carefully about every dollar we spend. We will only buy or use products and services that are truly unique, essential, and add great value. Many of the companies that make those products and supply those services are actually up in price for the year in this horrible market.

Companies like Apple, Google, IBM, Amazon, and Akamai were all up during the first quarter in a market that was down more than 10 percent. None of these is a commodity technology company. Each of them is uniquely positioned to provide products and/or services that are not available from others.

Companies that have no strategic niche or advantage or that provide products or services that people can get along fine without will struggle for a long time.

Money is being made in smart investments while most people are infatuated with how cheap once-great companies like Citigroup, Bank of America, and General Motors have become. I said months ago that common shareholders in each of these companies and many others could lose 100 percent of their investment. Some investors already have. These companies may make it and they may not, but it is a real gamble. Unless you really know what is on the balance sheets of these companies and what those assets are worth (the companies themselves don't know), then these investments are pure speculations.

So, the more things have changed, the more they have stayed the same. It is time to be smart. It is time to own stuff and great companies at discount prices. It is not time to view long-term government bonds as safe nor is it time to bottom-fish in once-great companies that you don't really understand.