May 3, 2012
One of the most important habits of highly successful investors is that, when market conditions call for it, they have the ability to sit on their butts and do absolutely nothing.
Great investors wait patiently for the next slam-dunk opportunity to present itself. They do not jeopardize their capital in half-baked ideas, nor risk money on investments in which they do not have conviction.
As the famous early 1900s stock speculator Jesse Livermore put it, “It never was my thinking that made the big money for me. It always was my sitting.”
Or, as the contemporary billionaire investor, Jim Rogers puts it: “I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.”
It’s good advice at any time, but especially apt right now as there are few OBVIOUS opportunities in the market.
The problem with so much of the investment management industry, however, is that they are paid to “do something.” And their mandates typically say that they must be “fully invested.” So, as money keeps pouring into mutual funds, fund managers have to buy things.
However, as an individual investor focused on absolute returns, as opposed to returns relative to a benchmark index, you have the luxury of being able to do nothing.
And sometimes, in investing, there really isn’t anything to do — other than sitting patiently and scouring the market for the next obvious trade or investment.
Right now in the markets, I see no obvious speculations. There are no “slam dunks,” such as when silver went parabolic and rose from $30 to $50 in a matter days early last year, and I went short. Or, when platinum prices fell well below gold prices towards the end of last year and I went long.
The few obvious opportunities– such as betting against the worthless paper issued by insolvent governments in the Western hierarchy-may take too much time to play out to qualify as a ‘slam dunk’ right now.
Besides, fighting the Fed certainly does entail quite a bit of risk… especially since all the money being conjured out of thin air by central banks has to end up somewhere. For now, that somewhere is the bond market– if only by default (no pun intended).
One day, the institutional market will wake up and find a sound alternative. Yet predicting when that day will be is not something that is obvious to me. In the meantime, I am happy to sit on my butt and wait, just as Jesse Livermore, Jim Rogers, many other successful speculators and investors in history have done.
Of course, even “doing nothing” also entails making decisions. What’s the best way to hold cash?
My own method is a system I developed based on takeover arbitrage, a model that even Warren Buffett has called a ‘cash equivalent’. Our 4th Pillar subscribers have been able to enjoy double digit returns through this system without having a single day in the red, ever.
Precious metals also make a lot of sense for those with a long-term view of their investment capital; gold and silver are among the best ways to hold savings if you distrust politicians and central bankers.
Holding physical metal can be cumbersome for funds earmarked for investment, though. The conversion back and forth to paper currency can be costly and time consuming.
If you’re looking to keep your risk capital plugged in to the financial system, Hong Kong dollars are an interesting option to consider; right now, the currency is pegged at 7.80 to the US dollar +/- a small band of variance.
In the event of a major deleveraging event that pushes the US dollar higher (like we saw in 2008), the Hong Kong dollar will strengthen against everything else concurrent with the US dollar’s rise.
If, on the other hand, the US dollar sinks away to its value in wallpaper or BTUs, the Hong Kong dollar will likely be released from its peg, reducing the inflationary loss on your capital.
It may also be a worthwhile to consider diversifying across a basket of currencies from stronger economies like the Australian dollar or Philippine peso. Simon has been vocal about the Chilean peso and Mongolian tugrik as well.
Of course, the minute I think there is an obvious, slam-dunk opportunity in which we can deploy our capital to make a solid gain with limited risk, I’ll let you know. In the meantime, I strongly suggest sitting on the sidelines.
Until next time,
Tim Staermose, Chief Investment Strategist