Following an exhortation by Rick Rule in his most recent appearances and interviews (Including the SF Hard Assets Conference in November), I will put out the idea that it makes sense to me to keep some money in cash, uninvested, earning little interest, in order to take advantage of dumb market moves, otherwise known as VOLATILITY. Why?
Well first off, if you are wise enough to do this, you can’t be TOO cautious ALL the time!
In the past, the chink in my armor has been personally keeping TOO MUCH cash on the sidelines waiting for the great opportunity. And when it came in 2008/09, I bought and sold too soon on some excellent companies, including Disney (bought around 15/share and sold around 18 – hey thought 20% sounded good!) and Microsoft (another purchase well below 20 and sold for 17%ish gain) – not too mention the opportunities in the completely destroyed microcap sector of the stock market!
But here’s Why: What to do with the cash you keep aside
But I am learning that sometimes, an asset is cheap enough. More recently, I’ve accumulated some positions in geothermal companies that
justgot the poop kicked out of them this year, especially compared to our uranium-related holdings! Because of the understanding of the economics (after excessive research) and fully aware that the time-table for execution is not an exact science, I have accumulated to the point where geothermal is up to roughly 7% of holdings for some clients (with certain growth investment profiles) and myself. What I didn’t do was get too excited and I was able to add to the position at cheaper prices as 2010 went through its corrections and swings – i.e. volatility.
This allowed me to buy as share prices got REALLY cheap in one company and the shares have since turned up to where I have a decent 8%ish gain (at least today I do – may change tomorrow). But I was sporting a 20%+ average loss and at the nadir, a 40%+ loss on my original small purchase. Although this doesn’t matter much because the companies are proceeding with plan and I expect cash flow to increase and assets to come on line and contribute over the next 3 years.
I also did this with a uranium exploration company where I bought an initial position, then a follow on position that reduced my cost basis almost 20%. it worked wonders when it tripled – that 20% reduction in cost basis works out quite nicely when it starts going up. I had the cash and patience and was rewarded for it. FYI: this happened to coincide with uranium getting “hot” recently and therefore those gains came quicker. Perhaps geothermal will get hot too (no pun intended) and those stocks will move up quickly- who knows? But I am prepared and ok with the geothermal companies executing and moving up on fundamentals (though getting a hot one feels nice sometimes, it’s important not to attribute the performance to one’s intelligence when it was a hot market).
Sometimes you miss something before you are convinced
There have been times too that I’ve been too cautious. There is a medical tech company that I am impressed with so far but don’t have enough of a wrap around the business to invest yet. it has since moved over 30% from my initial research but I can’t get too upset over that. There will be other opportunities – maybe even this one will come back to me:)
You begin to relish market corrections
Once you have this mindset, you begin to relish corrections. Why? Because you have the cash to take advantage of the volatility. And if you’ve done your research, and you like an investment, you relish the opportunity to buy at cheaper prices. Am I channeling a Buffett quote here?
Bottom line: keep your eyes open for a chance to strike (sometimes it’s a fleeting chance) and when you see something smart to do, you should do it!
Disclaimer: I am going to paraphrase a humorous but good disclosure I saw on another fellow’s page: Can I assume that you are a big boy/girl and you will not run off and make any rash/dumb/foolish/hasty decisions based on what I wrote? Even the best investors have advisors or knowledgeable friends that they can share thoughts with. Please do the same and seek counsel from an expert before making investment decisions. Thanks! For more disclosure, see my DISCLOSURE page!
For more information about me: About Chris
For more information about my professional firm, Walnut Hill Advisors, LLC – a financial planning, investment advisor firm in Medford, MA, just outside Boston. I travel often to places like San Francisco and Florida. I also travel frequently to Rhode Island and Maine. if you’d like to contact me on a professional basis (investment advice, financial planning, retirement planning, etc), do that through my firm contact here: C0ntact