Lately, I have been in a real investing funk. I cannot find any stock I want to buy at the prices I want. Despite, the subprime mortgage and commercial paper crisis knocking the market side-ways, I still find stock I am interested in way too expensive. I keep the number 12 in mind; the average p/e of the S & P 500 over the last 50 years is 12 (this means you are willing to pay $12 for each $1 of earnings). But I look at the stock I am interested in and they are way above 12- Procter & Gamble (23.16 p/e), Johnson and Johnson (18.79 p/e) and Pepsi (20.40 p/e) are all really expensive (figures as of Dec. 31, 2007); there is no way I am paying over $20 for $1 of earnings no matter how impressive the company.
Then I keep thinking that I don’t necessarily have to buy anything; cash is an over-looked portfolio allocation. Buffet has to buy; Berkshire Hathaway is an insurance company so he has to keep investing all those premiums the company receives in order to make a return which are above premiums paid out plus administration fees (the big secret of insurance is that it doesn’t make money on selling policies- it makes its money investing the cash it receives); he simply can’t sit in cash. Most good mutual fund managers sit on at least 5% cash. A lot of value mutual fund managers have a lot more than that (noted fund manager Francis Chou has 39% cash in his flagship fund).
It is always an internal struggle not to be fully invested. You watch investing shows or read the paper and you get the impression you always have to buy or sell something but the professionals keep a lot of money on the side. However, I keep getting concerned as my RSP has over 15% in cash and my non-RSP portfolio is over 30% in cash- am I over-allocated in cash?
The struggle continues between buying and doing nothing. Thoughts?
January 3rd, 2008 at 7:07 am
I’m usually between 15-20% cash, don’t see a problem with it.
January 3rd, 2008 at 7:18 am
And I thought cash was burning a hole in my pocket.
Bless your heart for pointing out Francis Chou sitting on 39% cash in his flagship fund. You’re also right about the 12 P/E Ratio.
Bring on the deals baby.
January 3rd, 2008 at 9:32 am
It’s very hard to patiently wait for the right opportunity. Wasn’t it Buffet’s partner Charlie Munger who said that half the world’s troubles are due to an inability to sit on its ass? If you can’t find anything to buy, you’re doing the right thing by sitting tight.
Me, I’m hoping to get some opportunities to buy in emerging markets (I refuse to pay developed market multiples for emerging markets), REITs and real-return bonds.
January 3rd, 2008 at 9:43 am
Thanks for all your comments. I once read an article about a value investor who said he bought once a year (if that). I guess the key is not to be mad with your money.
January 3rd, 2008 at 2:01 pm
CC is right… if you don’t feel comfortable investing a particular stock at these levels, don’t do it.
I’m currently at around 85% cash. I might be missing out on some quick cash but at least I can sleep at night.
January 3rd, 2008 at 4:37 pm
Having your assets in cash is great if you can’t see an investment that you think is a good one. Personally however I believe there is always an outstanding investment out there somewhere. If you don’t see it you just aren’t looking in the right places!
And don’t forget about inflation. Some experts claim that the real rate of inflation has been depreciating the dollar by 90% every 30 years. So if you aren’t making good money with your money you are losing it to inflation big time!
January 3rd, 2008 at 5:24 pm
I have some clients as much as 55% cash right now. If we can’t find something we are confident in, we will sit on cash. Dundee’s ISA is paying 4.1% (4.3% F-class) – so something has to be pretty compelling to beat a guaranteed, totally liquid 4+%.
Having said that, I’m probably going to initiate some more buys into BNS – the yield is healthy – after-tax it will beat the cash and they just raised their dividend. They seem relatively unscathed compared to the other banks wrt the ABCP and US subprime exposure. However, can’t add any more than 5% positions since it will violate our IPS. (Disclosure: I work for a division of BNS and own the stock personally).
January 3rd, 2008 at 7:48 pm
I understand the feeling TMW.
I am trying to think of cash as an investment as well.
The thing that bothers me is cash does not yield, like good dividend paying stock do. If I want to see my income/year rise I need to buy, but that is the wrong attitude to have…
January 3rd, 2008 at 7:57 pm
GI- I think the statistic I read is that money loses 50% of its value every 30 years due to inflation. As WhereDoesAllMyMoneyGo suggested, I put my money in high interest accounts which at least keep up with inflation.
BNS is a good stock but I am over-weighed in banks already so I wouldn’t add any more positions in banks. Good pick!
January 5th, 2008 at 10:35 pm
Consider paying down part of your mortgage with your non-registered cash. While you’re waiting for the right investment opportunity to come along, your cash is “earning” tax-free income due to the interest saving.
When investment opportunities present themselves, borrow from your HELOC and enjoy the tax-deductibility of an investment loan.