This month the investment club brought in a few thousand in new dollars to invest but after scouring the market I can’t really find any positions to place it in. First world problems. Better to have cash and no deal than a deal and no cash.
When I look for stocks I look for under valued opportunities, usually stocks getting beat down with bad press (think Equifax) or, based on a multitude of factors, the stock is just selling lower than I believe it is worth (read Under Armour). For some reason I don’t really see anything peeking its head up, I blame Trump for this booming economy. Darn you Trump for making America great again!
Right now, the investment club is booming. The market is setting record after record and most of our top holdings are doing crazy well. I just don’t see an entry point for new money. That doesn’t mean that we go to sleep at the wheel but we don’t want to just hop into something for the sake of saying we are in something, sometimes cash is also a position.
This isn’t something I made up though. This is a concept I took from Tela Holcomb, professional trader, and 30 year old retiree. Here are three reasons why staying in cash can be a strong play.
Not at risk of losing
This might sound obvious, but when you stay in cash you aren’t at risk of a market correction. Staying in cash and watching the market, not forcing a trade because that is what we do when we get money, lets us maximize the upside and limit the downside. When I first started investing I would make the mistake of hopping in what was running up. As soon as it ran up I would lose because the stock would turn against me. That was usually the winners taking their profits at my expense.
Given the state of the market we could potentially walk into a correction just based on the the consistent record breaking levels. Buying what is hot just because it is hot could have us walk into a five percent loss like I used to do when I was just getting started. Its possible that the market will continue to run but its also possible that it won’t. We have to continue to look for deals not just a place to throw away our liquidity. In the words of Warren Buffet, the number one rule in investing is don’t lose money. Number two is to remember rule number one. The goal here is to make money but also not to lose money. By avoiding a potential top we guarantee we don’t lose money.
Opportunity to buy the bottom or the dip
Sitting on the sidelines will allow us to capitalize on the 20%-30% dips that happen when scandals and bad press break out. This will allow us to pick up huge gains almost immediately on the BUY side of the deal. We have a lot of winners but those winners came after a year of investing. Buying a dip on bad press could allow us to pick up 20-30% over night, just to sell it when the stock returns back to par.
An example would be Equifax and Wells Fargo. Those companies are all great, well established companies with great balance sheets, cash reserves and earnings. A scandal often times doesn’t change that. The only time this strategy has failed me was Chipotle, and I still have hope for Chipotle. Keep cash on the side to buy great companies with bad press.
You never know whats coming
The problem is that we aren’t holding a crystal ball and we don’t know what is going to happen. We are finally at a point where we have significant holdings invested in the market that we can win big on a run while holding cash. We don’t need to go all in and having the ability to have a chunk of cash in cash gives us way more power. We aren’t 100% liquid but we are partially liquid. This is why I am an advocate for stacking our cash this month, bringing in more cash next month and finding a deal to put it in.
To recap, cash might not make us money but it will not lose money. Second, it allows us to buy a true deal hard and fast and third, we don’t really know what is going to have in this market and we don’t want to be completely invested either way it goes. Either it shows more strength and we load up or it shows weakness and we load up. Either way, we load up but we load up with a plan and a cushion. That is true power. If you want to get some financial power and invest with our club we would love to have you. Email firstname.lastname@example.org to sign up today!
Be great, invest well,