A New Year’s Resolution… early
It isn’t year-end yet and here I am already making my New Year’s resolution. Why? For one thing, boredom. I’m not finding many new investment opportunities, and most of the blogs I read are in semi-hibernation or have simply disappeared (where are you Shadow Stock?). Are these two connected? Most likely. It was certainly a sign when Greenbackd stopped posting almost a year ago. In any case, the overall market continues to be range bound, with the S&P 500 between 1,100 and 1,350, weighted down by the European sovereign debt problem. More frustrating yet, most equities seem to move in near lockstep. What few potentially interesting opportunities there have been, like JEF (due to the MF Global debacle), are unfortunately outside of my area of competence, and so, off-limits. So I have to content myself with reviewing my existing positions, which still seem to be among the best opportunities out there, and, where appropriate, adding to them little by little.
In these doldrums does danger lurk! The cardinal sin of value investing is swinging at a pitch that isn’t in your sweet spot. So, how to keep our little hands happy while we wait? I often go back and re-read some key value investing texts which I then use to re-evaluate my current strategy and investment choices. A week or so ago I was rereading Howard Mark’s comments from last May (which now seem propitious). They were written just after the most recent market top and Marks was commenting on (or lamenting) the return to a less risk-averse investor attitude compared to the rampant panic widespread during financial crisis of 2008/09. How quickly we forget, seems to be the repeated chorus. Well, he was right. Three months later and investors discovered the European problem; until recently we were in risk-off mode again, the market trending down as investors shifted out of ‘risky’ equities. There was a generally negative investment atmosphere, even a whiff of recession in the air. Things looked bad and there was (and perhaps still is) the possibility of a catastrophic outcome with the disintegration of the euro zone. The result: I began to feel comfortable again. But of course we don’t know whether, after our latest little rally, sentiment will get more negative, how much more negative or how long it might stay negative. I’m a bit sorry that my cash position is not just a tad higher; I’m sensing that there could be some opportunities coming up. Which leads back to my New Year’s resolution. It has to do with discipline, Buffett’s 20-punch card and having enough cash to take advantage of opportunities.
My resolution is simple: only invest when the opportunity is an exceptional one, otherwise keep your shirt on and the cash in the bank. I was rereading some of Klarman’s examples in Margin of Safety, and my own holdings seem to pale in comparison; hardly any are the slam-dunks he described. Perhaps my investment criteria are too lenient. Perhaps I’m not scouring the universe with enough fervor? More likely, it’s simply because I am not waiting for the really fat pitch, and then when I do swing, it’s without enough follow through (i.e. the position I take isn’t large enough). So, my resolution: more cash on hand and less compromise when evaluating a potential investment. To some degree this is my take away from Klarman’s Margin of Safety. He emphasizes absolute return rather than relative return. It’s a lesson I soon forget, so I keep a copy of his book on my netbook to reread on trains, planes and automobiles. To drive the lesson home I contemplate what my portfolio (and investing results) might have looked like had I followed Klarman’s definition of value investing more assiduously during the period around the financial crisis of 2008/09. In fact, I often contemplate whether my strategy shouldn’t be simply to remain in cash except during periods of severe economic upheaval (like the 2008/09 liquidity crisis) when funds would be invested, then slowly liquidated over the ensuing recovery. That kind of strategy, however, comes directly from the most recent market experience, and we know that the markets rarely repeat, though they often ‘rhyme’. What if we were in 1960? How many years might one be ‘waiting’ in cash and missing the market advance? Would we have the temperament to stay in cash for 5 years while the markets advanced strongly? I sincerely doubt I it. That requires exceptional staying power even without clients yelling at you from the other end of a phone. So, while this kind of strategy seems intellectually appealing due to our two most recent market experiences (the late 90’s tech boom and the subprime mortgage crisis), I don’t really believe it is implementable for mere mortals like me. Still, more cash and less trash is my leitmotiv for the new year.