On taking your finger off the trigger and greasing the barrel instead

In response to my blog on holding cash because the alternatives are even less attractive, a reader recommended an article by John Hussman, who agrees now is a dismal time to invest, and includes a very good quote.

Howard Marks, The Most Important Thing (2011):

You simply cannot create investment opportunities when they’re not there. When prices are high, it’s inescapable that prospective returns are low. That single sentence provides a great deal of guidance as to appropriate portfolio actions. Investment risk comes primarily from too-high prices, and too-high prices often come from excessive optimism and inadequate skepticism and risk aversion… The motto of those who reach for return seems to be: ‘If you can’t get the return you need from safe investments, pursue it via risky investments.’ It takes a lot of hard work or a lot of luck to turn something bought at a too-high price into a successful investment. Patient opportunism – waiting for bargains – is often your best strategy.

Marks is self explanatory, although I find patient opportunism difficult, as did Seth Klarman, in 2004:

The alternative [to buying overpriced securities] is to remain liquid, defy the steady drumbeat of performance pressures, and wait for the prices of at least some securities to drop… This path also involves risk in that there is no certainty whether or when this will occur; indeed, securities prices could rise further from today's lofty levels, making the decision to hold cash even more painful…

The name of The Thrifty 30 adds to the misery as it includes an implied target, although it has never had thirty companies in it. Since I’ll only add more companies at the right prices, perhaps it will be easier if I relinquish myself from the burden: Thirty is an aspiration, not an obligation.

As Klarman went on to say, investing in over-priced shares is hypocritical:

A corporate management that invested capital at low expected returns just because they had the funds at their disposal and nothing immediately better to do would inevitably arouse investor ire. Why, then, should any investor (hedge fund, mutual fund or individual) always deploy 100% of their capital into marketable securities, applying none of the analytical rigor or intellectual honesty they would demand of the underlying corporate managements?

Obviously its generally better to invest in businesses than in cash, as Warren Buffet said in 2009 (see: the Buffett FAQ):

The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing… Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don’t want to pay too much for them so you have to have some discipline about what you pay. But the thing to do is find a good business and stick with it.

But it’s not always possible, as he said in 2003:

We have $16 billion in cash not because of any predictions [about a market decline], but because we can’t find anything that makes us want to part with that cash. We’re not positioning ourselves. We just try to do smart things every day, and if there’s nothing smart, then we sit on cash.

So, what to do in the meantime? Keep looking, turning over rocks, as Peter Lynch says, there’s always something to do according to Peter Cundill.

I’m contemplating reversing the usual quest for bargains, when it’s likely to be fruitless, and instead familiarising myself with some really good companies so I’m ready to add them should prices fall. This is the tactic of Canadian investor Jim Chuong, whose annual reports make rather fascinating reading.

Latchways comes to mind, and some of the companies I regret not investing in during the credit crunch. Victrex and Porvair come to mind. Also, existing members of the Thrifty 30 fit this category too. Castings, Games Workshop, and Dewhurst, for example.