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Patience… and more patience!

January 22, 2013

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.

  1. Ruyiswick permalink

    if there is more downside than upside… (with which I agree, perhaps with the proviso “not yet”) — are you all cash? significantly cash? planning to go to cash? are you ever 100% cash?

  2. I know better than to try and time the market..but I do build up cash reserves when I don’t find anything really compelling to buy. Unless things are all out ridiculous I would never have 100% cash. A high cash position for me might be 30-40%. Right now I’m just under 20% in cash but have a good size position in the DGTC odd-lot tender which I consider practically cash. If that were included I would be over 25%.

  3. bob permalink

    any idea why radioshack popped 14%. i think sac capital bought a lot recently. any thoughts on whether it has a chance to recover to your target? thanks much.

  4. No idea at all why the shares have bounced up. I’ve been hesitant to commit fully to RadioShack because I was looking for a blowout, a big fall in the price after an earnings miss. I’m not sure we’ll get it. Last Fall’s change in management may have been the bottom. We’ll see with the next earnings announcement, which I don’t think will be pretty. Below $2 I may be a buyer again, but we may never get there if the market becomes ‘risk on’ again.

    And, yes, I do think the company is worth something, and considerably more than the current market cap. Right now I consider we are looking at a much larger upside than downside.

    Thanks for your comment.

  5. bob permalink

    i’m looking at splp per your post. am wondering why not buy hnh outright – seems pretty cheap. also, steel excel seems super illiquid and there is a massive allocation in splp to steel excel. still trying to figure out what steel excel is as i am new to the stock. would love to hear your take on steel excel in layman’s terms.

    • Bob,
      The reason to purchase SPLP instead of HNH is simply that with SPLP you buy the underlieing portfolio at a 30%+ discount. Now you may not like SPLP’s portfolio of assets, that’s another question. And you may not like the fact that SPLP is rather illiquid (but unless you’re taking a big postion why would it matter?)

      Steel Excel owns an investment portfolio (mostly bonds, treasuries et al) and some operating businesses (mostly in the oil well drilling field, but with a dab of leisure time – sports- businesses). In terms of book value I’d put the former at about 60%. I look at SXCL as Lichtenstein’s investment vehicle for ???? something, though I don’t know what. He’s in the process of consolidating the SPLP empire and hopefully making things a bit more transparent.

  6. Patience is an important part in this business. And I definitely agree with your thoughts on stocks right now, Personally, I feel that the safest route of all – now, as always – is to invest in precious metals. I feel safer with my money in gold and silver than in anything else.

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  1. Performance January 2013 – The importance of being patient « valueandopportunity

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