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One of the Greediest Things You Can Do as an InvestorBy
Thursday, May 12, 2011
Last month, I touched the "third rail" of investment advisories.
I said the one thing most investors can't bear to hear. I told them to hold a good chunk of their portfolios in cash... to be patient on making new stock purchases... and to expect to make a fortune with this idea.
Some of my readers were furious that I refused to go where the "action" is... that I'm not swinging for the fences with risky stocks.
For better or worse, most people have to have "action" in their investment portfolio. That's why most people lose in the stock market. They refuse to wait for "can't lose, no brainer" opportunities and values... and instead settle for "well, this might work out" ideas.
As I've been telling my readers, the market is full of "well, this might work out" ideas right now.
Today, the S&P 500 is selling for about 17 times trailing earnings. That doesn't seem terribly overvalued. But it sure isn't cheap. The broad market doesn't offer much in the way of dividends, either. The S&P yields less than 2%. Commodities have soared in the past six months. Government bonds offer a tiny yield of 3.22%. They are a disaster waiting to happen...
That's why I'm keeping plenty of "dry powder" and recommending others do the same in the form of U.S. dollar cash and "real money" – gold.
Holding a large chunk of cash when stocks are expensive is one of the greediest, most opportunistic things you can do as an investor. It's vital to making large returns in stocks over the long run.
You see, nothing keeps an investor's options open like holding cash. Right now, with stocks and bonds overvalued and commodities overdone, investors lack alternatives. Cash alone gives you the option to buy anything, anytime. If you find a cheap stock and you have cash, the stock is as good as yours. If you have stocks and no cash, you'll have to borrow cash against your stocks (usually at high rates) to buy other stocks.
You might think cash's "optionality" is easily trumped by inflation. If you're talking about holding a dollar for 10 years and doing nothing with it, I agree. I'd never recommend you do such a thing. It's a horrible idea. But a good investor can handily beat inflation over time...
Sideways markets, such as the one I expect for the next several years, contain multiple bottoms, where great bargains will be found. Using your cash during such times will more than preserve your purchasing power. Take the most recent bottom, in early 2009. That April, I told my readers to buy semiconductor giant Intel (NASDAQ: INTC)...
If Intel makes a little less money this year, it's not because it screwed up or lost market share. It's because the entire global economy is depressed. Over time, the world will use more computers, more Intel chips, and the company's growth is virtually guaranteed.
Intel's 2008 earnings per share came in at $0.92. If you value Intel like a World Dominator, at 25-30 times earnings, the stock would be worth $23-$28 per share. It trades for less than $16 today.
Since then, my readers are up more than 50% on share price appreciation... and have collected nearly 10% in dividends. And Intel just raised its dividend payout this week.
If you don't have cash ready, you'll never see that kind of return in a big, safe stock. You won't be able to buy it. And the opportunity will pass you by.
The problem is, most people have no patience, so they buy whatever sounds sexy at the moment... and then suffer huge losses when their overvalued purchases fall in price.
The patient, greedy investor knows holding cash will allow him to take advantage of the bargains – like Intel – that will appear. The average loser doesn't see it this way, but successful investors see cash as "returns waiting to happen."
Get greedy for those returns. Hold cash.
Good investing,
Dan Ferris
Further Reading:
Last month, Dan laid out his four-step plan to prepare your portfolio for whatever comes. "The best part is," he writes, "no matter what happens, this advice ought to protect your money and make you a profit." Get Dan's advice here: Four Ways to Prepare for and Profit from "Financial D-Day".
Doc Eifrig told DailyWealth readers about an interesting way to safeguard your portfolio from the plummeting U.S. dollar. "All you need is an Internet connection and a regular brokerage account." Learn more here: How to Easily Diversify Your Wealth Overseas... and Collect Super Safe Income.
Market NotesTHE WORLD'S WORST ETF? The spectacularly bad performance in popular natural gas investment fund UNG continues...
In the past five years, there's been a huge increase in the number of "one click" trading vehicles that allow folks to invest in individual commodities and broad market sectors. One such vehicle is UNG, a fund that claims to give investors a way to own the "contrarian's commodity," natural gas. The fund has attracted billions in investor cash. It has also attracted scorn from us... because UNG's structure causes it to "bleed" value over time.
For a picture of this bleeding, we offer the recent performance of UNG (black line) plotted with the common measure of long-term natural gas prices (blue line).
As you can see, natural gas has advanced by a double-digit percentage... while UNG has plunged more than 50%. Only Wall Street could create a vehicle that manages to lose money while "tracking" a rising asset... and charge fees all the way down!
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