HIBERNATION: Hold Cash, Keep Your DISTANCE!

I’ve been writing about the last hurrah, the blow-off top, the rally to end all rallies in these past few months.

Time and time again, my stance has been to stay LONG the S&P 500 because the bull market isn’t dead, but I want to make sure we’re on the same page, as it relates to the big picture here.

Imagine a person playing with a yo-yo, up and down, up and down; while you’re trying to time these movements, the pace and flow changes.

Then, zoom out and realize this person is on an escalator, going up. 

Corporate America is this escalator, but the yo-yo’s ups and downs are the natural competitive forces of the free enterprise system (not so free anymore), churning out companies, who are losing their edge, unique advantages, and clients. It is the irrational emotional behavior of investors, buying and selling businesses every single day, according to the short-term news.

By holding a basket of the biggest stocks, your portfolio keeps going up the escalator, not without experiencing the yo-yo volatility, but knowing that it doesn’t matter in the big picture.

At rare moments, the escalator’s machinery is in need of maintenance, repair or a full-scale modernization, but it keeps right on up, once it’s taken care of.

Similarly, the economic machine in the U.S. encounters major bumps along the way, such as 1929 and 2008, which are more traumatic, and there have even been double-digit moves down in every decade.

The ideal scenario, of course, is to be there ready, precisely as the escalator has just been repaired, since it’s in tip-top shape. In practice, this means having cash ready and buying, buying, buying, as the market starts ascending again, after these moments of seeming defeat for the capitalistic system manifest themselves in mass panic.

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So, if you’re not invested at the moment, know the escalator has been running straight for 10 years in a row; it will need some repair soon. Many think it will require a gut job (financial reset), while others see a routine fix (correction or a mild bear market), but regardless, it’s coming, so if your mind is thinking in 20-year increments, be cash-rich right now, anticipating this big buying opportunity, which is coming.

Now, if you’re already on the escalator, why get off of it?

The escalator will continue going up over time. Your only concern is the individual stocks you’re holding, NOT the S&P 500 basket, but the individual stock picks you’ve made, the companies you own on a case-to-case basis, won’t survive this maintenance phase. Maybe they are a part of the components that will be thrown out and replaced entirely.

General Electric, for example, is one such stock. The risk attached to it is called Permanent Loss because it might be one of those parts that get thrown away before the metal ingredients are reassembled at the belly of the engine.

Permanent Loss is inevitable – everyone hits their stop loss price at some point when investing in individual stocks because any of them can start to languish. Most businesses die. That’s a fact of life.

By indexing, you remove that risk, but you’re making the decision to always stay on the same escalator, even while others are using the same one, but are running on it, beating your progress speed or using more advanced escalators.

Charlie Munger has wisely said that there will always be someone getting richer faster than you, but “that’s not a tragedy.” I couldn’t agree more.

I’ve always maintained the notion that building my main sources of income, via businesses or a career will help me to have more cash to invest; thus I could take less risk.

You don’t have to participate in this anticipated rally. Buying heavily today is certainly not considered bargain pricing.

Know this, though – when the escalator is in maintenance mode, some people choose to use the stairs. Normally, very few do, but at times of repair, there’s a demand for them. Gold is the staircase in the investment world, which only gets favorable attention, when all else goes bad.

That’s why you don’t want to be a permanent gold bull, while the escalator is working just fine, but you do want to be first on those stairs, to avoid being late for work.

Nothing terrible will happen if you go into hibernation, sit on cash, and wait until the crash has played out, giving you generational buying-opportunities.

Be patient.

Best Regards,

Tom Beck
Research Partner, PortfolioWealthGlobal.com

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Legal Notice:

This work is based on SEC filings, current events, interviews, corporate press releases and what we’ve learned as financial journalists. It may contain errors and you shouldn’t make any investment decision based solely on what you read here. It’s your money and your responsibility. The information herein is not intended to be personal legal or investment advice and may not be appropriate or applicable for all readers. If personal advice is needed, the services of a qualified legal, investment or tax professional should be sought.

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