Patience… and more patience!

You might be asking why I haven’t been blogging recently, or why I’ve not been writing about any new investment ideas. Um, well, part of it is I just have so much money to invest and I happen to be quite happy with my current holdings, thank you. The US equity markets have been going up recently, in case you haven’t noticed, which makes most of the things I might want to buy more expensive. I couldn’t find much to get excited about last Fall, and now that the equity markets are +5% higher, well, I think you get the picture. When it comes to investing, there are times it pays to just do nothing, sit back and enjoy the show. I think right now is one of them. I have no idea if the ‘market’ is going to rise or fall from here. What I do know is that I have a basket of stocks that I think are undervalued, and that a 5 or 10% move upward doesn’t put a dent in that undervaluation. I try to buy shares in companies that I think Mr. Market is undervaluing by a factor of 2 or more. So what does a 5% move in a share price do for me? Nothing, absolutely nothing.

I’m writing this, of course, to focus myself. One of the hardest things to do is…. to do nothing. The instinctive reaction to a rising market is to pile on, add shares, up your leverage. But really that’s the absolute worst thing you can do. Don’t kid yourself. How will you know its time to dump those margin shares? Most likely you’ll see them rise and enjoy the inflating ego. But when they start on their downward trajectory, even if the market declines slowly (and it usually is not so compliant), you won’t sell them. You’ll be waiting for them to go back to their previous highs. They won’t, and you’ll hold on until there’s a loss, or until you decide you really bought them as a ‘long term investment’.

So I’m just sitting pat, waiting for one or more of my positions to reach my estimate of intrinsic value, or rather my estimate of where I should exit (slightly below intrinsic value). The rising market doesn’t sway me. In fact, I’m beginning to get a bit worried. I saw it in Barrons just this weekend, an article titled “Is a new bull market on the way?”. This, for me, is a warning sign. When most people think a new bull market is on the way… it ISN’T! The more optimistic everyone becomes, the more pessimistic I become. It’s my way of staying behind the crowd, so I don’t get trampled!

I was lamenting to myself as early as a year and a half ago the slowing of activity on Greenbackd, my favorite blog back during and after the 2008/2009 financial crisis. Back then, there was a new net-net being analyzed every day. Then slowly, the number of net-net’s diminished, then the quality of the net-nets diminished, then Greenbackd went practically dark. Why am I bringing this up? Well it was an indicator. The easy money was made buying during the meltdown.  Perhaps the Barrons article is the same kind of indicator, but in reverse. After all, shouldn’t the Barrons article have been written in February 2009, not now when the markets have almost doubled? Where is the market P/E today? Not really at historical highs… but certainly not at historical lows. How can a new secular bull market begin today unless you believe that suddenly the economies of the world are going to shrug off their debt loads and economic growth rates will suddenly shoot up to 5%, 6% or more? Usually secular bull markets begin from single digit P/E environments. So, LETS KEEP THINGS IN PERSPECTIVE. It appears to me that there is greater downside potential for equity markets today than upside.. and I like one-sided bets. Equity markets may certainly go up 10% even 20% from here. What to I know? I’ll be the first say “nothing”, “zilch”, “nada”. No, there is one thing I know – I have no predictive skills. But I don’t like the odds today. At least not as much as I liked the odds in February 2009. So I’m keeping my 20% cash position for a rainy day, and maybe I’ll even add to it if Mr. Market becomes really manic.