One of the things that I wanted to do on this blog is to post whenever I buy a new stock or ETF or add to an existing stock or ETF position.
As I noted from my post, What I expect from the stock market going forward, I think the S&P 500 is significantly overvalued at the moment. The ratios that I discussed in that post still show mediocre or even negative returns going forward. So because of this, I haven’t bought any ETFs that track the stock market recently. I was fully invested in ETFs as of early 2016 and haven’t bought any since. These ETFs have gone on to perform pretty well since my last purchase so I’m not complaining.
With respect to individual stocks, I did buy some throughout 2016 but haven’t purchased any since US election day (Nov 8, 2016). Prior to this, I was fully invested with only a bit of cash. My stocks have gone on to perform well after election day. However, this creates a problem for me because the stocks that are on my watch list (many of these are the same listed here in my Stock Holdings page) are no longer bargains. It’s been tough to find deal on individual stocks recently. I like Nike but I’ve built out a large position in the low 50’s already.
So what have I been doing recently?
I’ve been building up my cash positions in various accounts. I’d like to build cash positions of around 15%-20%. Holding cash is generally not a good idea because inflation erodes its value. But the potential returns that can be made by waiting for stock valuations to come to more reasonable levels or waiting for certain individual stocks to come to normal levels can greatly exceed the value your cash loses in inflation. Heck, Warren Buffett’s Berkshire Hathaway is sitting on $85B in cash. He’s not doing this for the fun of it but because he probably can’t find any good deals right now. So he’s waiting for an opportunity to pop up. Johnson & Johnson is sitting on a cash hoard of nearly $40B.
I’m not trying to time the market. I’m just waiting for the valuations on the stocks that I follow to come to more reasonable levels. It’s not about timing the market, it’s about getting the valuation of your investment right. If you overpay for a stock, you’re pretty much guaranteeing yourself sub-par returns in the future since the valuation is likely to come down. In addition, I’d rather hold cash then invest in an overvalued stock where my returns would lag inflation or even be negative for years on end.
Stock prices can stay lofty for a while but they will eventually revert to the mean (i.e., a normal valuation). This is why patience is rewarded.
Not selling stocks you own when they drop in price is a psychological test. Most investors adhere to the “buy high, sell low” philosophy because they can’t stomach the idea of their investments dropping in value. The key is to go against the herd. Always adhere to “buy low, sell high” or “buy low, sell never” which is what I like to do. I like to buy shares of great companies and never sell them. It takes a lot of mental fortitude and will power to not sell when everyone else is selling. If you can hold on while everyone else bails, you can end up doing well because the market eventually recovers so you haven’t lost anything (since nothing was sold).
Buying share of companies that you own when they drop in price is another psychological test. I always tell myself that when my stocks drop in price, it’s an opportunity to buy more – this is of course true as long as the company’s business hasn’t been permanently impaired. Adding to investments after price drops can also help you make money because as I mentioned earlier, the market eventually recovers.
So, for now, I’m building up my cash reserves and waiting for some stock price drops.