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Why there’s no shame in sitting on your butt


May 3, 2012
Hong Kong

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
Sovereign Man

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

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About the author: Born to a Danish father and British mother, in Dar Es Salaam, Tanzania, Tim Staermose has led an international life since the day he was born. Growing up, he also lived in Egypt, Denmark, and Singapore, before eventually settling in Australia, where he completed his education and took out citizenship. Since then he has also lived and worked in Hong Kong, and Manila, Philippines, in the field of equity research — both for a bulge-bracket Wall Street investment bank, and for an independent investment research firm. Today, when not traveling the globe looking for investment and business opportunities for the Sovereign Man community and catching up with his diverse, multinational group of friends, he divides his time between Hong Kong, and the Philippines.

Comments on this entry are closed.

  • Gene

    ” there are few OBVIOUS opportunities in the market”

    Hmm. Good article, but I would differ on the above point. For instance, the theme of buying high dividend stocks that are also moving from the lower left to upper right (an uptrend)  is a theme that continues to work. FedGov cannot raise rates without BK’ing themselves, so rates will be held low awhile longer. As long as this continues, and real rates are negative, the high dividend theme will work. consider AGNC to be a classic example of this type of trade, but there are MANY out there…gas pipeline companies, LP’s, REITS, cigarette stocks (MO/PM) etc. will often be applicable to this theme.  -Gene

  • http://profile.yahoo.com/KAI76RBHFNO2EXIASGREG23Q6I hkguy

    Beware the AUD, near all-time highs, and extremely vulnerable to a China slowdown cum crash.

    • Gene

       The trick here is, AUD is high *vs what?* We are in the midst of competitive devaluation, and this process can be cloaked if countries are devaluing together. GOLD is the thing to measure these currencies against…NOT other currencies. With regard to china impact on AUD, agree completely. When pondering China, have to appreciate that with centralized command and control, their economy can be engineered to behave in ways we would not normally expect, and this can go on for much longer than one would imagine. But yes, at some point it will break, likely in an ugly way.

  • Chris Formoso

    Hi Tim! How exactly may we subscribe to your 4th Pillar system? I’m from the Philippines and only recently got back into stock trading/investing but I believe the local market is highly limited despite the index moving to new highs. I was hoping to learn other strategies like your 4th Pillar systemand go into other markets for well.. bec it’s pretty fun :) (losing money sucks balls but I guess as long as I live to fight another day it’s fine)

    – Chris Formoso

  • Jo McIntyre

    Great advice – you suggest enough options that we can pick one or some that fit our own phobias. Sitting it out is the hardest of all investment moves. Your comments on mutual funds are also on point. I quote you often on my own blog: investingforone.com

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