Holding Vs. Deploying Cash

I’m just another young guy, at 30 years and counting, trying to achieve financial independence at a young age. My main mission with this blog is to chronicle my journey from a negative net worth to retirement in 12 years. As such, this being my real life, it’s of the utmost importance to me that I do everything in my power to maximize the possibility of this goal actually being achieved. As many of you already know, my strategy is to invest fresh capital on a monthly basis in attractively priced high quality dividend growth stocks and to keep most of my net worth there, eventually living off the dividend income my portfolio will provide.

One concept that dividend growth investors, including yours truly, often talk about is the right time to deploy cash. When’s the right time to invest? If the Dow Jones Industrial Average just moved up 300 points over the last two weeks, is it better to wait for it to come down? I just got my paycheck yesterday, but I should hold it for at least a few weeks before I inject fresh capital into my portfolio right? The Shiller PE is above 20 right now…maybe we should wait for a correction, right?

This article is going to lay out my exact thoughts on this issue. The answer is – there is no right answer. Unfortunately, as many things in life, it depends. It depends a lot on how much capital you have to invest with, how long your investing horizon is and where individual equities are at in terms of valuations. Ultimately, opportunity cost is at the heart of this matter.

Per Investopedia, the definition of opportunity cost is as follows:

“The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.”

So, by holding cash you’re forgoing the opportunity to earn a potential return on your capital. By holding cash, you’re going to consistently lose purchasing power as the invisible tax known as inflation eats away at the true value of your principle. On the other hand, you could also invest in an asset that loses value. Investing in dividend growth stocks (or any asset for that matter) that are significantly overvalued will lead you to conclusion #2.

Benjamin Graham, the oft-cited forefather of modern value investing wrote a bit about this phenomenon in his seminal work “The Intelligent Investor“:

We are convinced that the intelligent investor can derive satisfactory results from pricing of either type. We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator’s financial results. This distinction may seem rather tenuous to the layman, and it is not commonly accepted on Wall Street. As a matter of business practice, or perhaps of thoroughgoing conviction, the stock brokers and the investment services seem wedded to the principle that both investors and speculators in common stocks should devote careful attention to market forecasts.”

“There is one aspect of the “timing” philosophy which seems to have escaped everyone’s notice. Timing is of great psychological importance to the speculator because he wants to make his profit in a hurry. The idea of waiting a year before his stock moves up is repugnant to him. But a waiting period, as such, is of no consequence to the investor. What advantage is there to him in having his money uninvested until he receives some (presumably) trustworthy signal that the time has come to buy? He enjoys an advantage only if by waiting he succeeds in buying later at a sufficiently lower price to offset his loss of dividend income. What this means is that timing is of no real value to the investor unless it coincides with pricing—that is, unless it enables him to repurchase his shares at substantially under his previous selling price.”

“By pricing we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value. A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks. This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels.”

Graham, a true genius when it came to investing, starts this off by talking about profiting from both timing and pricing. Timing would be trying to profit from what one perceives as upward or downward market trends and investor sentiment. You would hence sell when the market is likely to dip or dive, and conversely buy when the market is trending upwards. Profiting from timing is of no concern to me, and I pretend it doesn’t even exist. I don’t trade on trends, and I don’t time the market. Profiting from timing is extremely consequential to traders and speculators, however.

So, we move to pricing. With pricing, and the arbitrage of such, a long-term (or long-pull as Graham calls it) investor is looking to purchase stocks sufficiently and significantly, if possible, below their intrinsic value which would allow you a margin of safety. The investor would then continue to hold this asset as long as it remains attractively priced on an ongoing basis (as profits continue to rise and allows for price expansion) or sell when the stock rises sufficiently above intrinsic value. Graham, it should be noted, was not a dividend growth investor and was not shy about selling stocks when he thought they were fully priced.

Graham, however, explicitly refers to dividends above when talking about pricing. He explains that an investor would only do well to wait on a better price (that may or may not come) if the lower price (if achieved) makes up for the lost dividend income (as opportunity cost) that the investor would have laid claim to had he invested in the stock at an earlier date.

For example, let’s say you think Philip Morris International (PM) is expensive right now. At a price of $84.65 currently, you determine intrinsic value (through DCF analysis or other) of this stock at $83. Let’s say PM misses analyst expectations in the third quarter of 2013 and it falls to $82.80 and you decide to pull the trigger. Would you be better off? Well, at a quarterly dividend rate of $0.85 per share you would have accumulated three quarters of dividends between now and then (ex-dividend dates in 12/12, 3/12 and 6/12) totaling up to $2.55 per share. So, $84.65 (today’s price) minus $2.55 (the accumulated dividends) is $82.10. In this example, you would not be better off. Of course, this is just cherry picking an example and using hypothetical future numbers. It does, however, give you some framework on which to quantitatively base a pricing decision. And, on the other hand, that $82.80 share price may never come in which case you really lose out. PM may instead rise to $100 per share, and a pullback to $90 (well above the numbers referenced above) now represents a good entry point.

Let’s instead use some real numbers from our past. In a recent article I said:

“However, what I really tend to look at is future expectations. If you buy shares in McDonald’s for $86.08 a piece, as I did recently, or if you buy them for today’s closing price of 84.05 will it really matter all that much 20 years from now when MCD shares are available on the market for $700 each? Probably not. That’s not to say that I don’t believe that purchasing stocks on a strong value basis isn’t important. Quite the contrary, as I believe valuation is paramount to a dividend growth investor’s long-term success and total returns.”

Let’s continue with the McDonald’s Corporation (MCD) example. You could have purchased MCD shares back in 1992 (a timeframe I referenced in the article above) at many different prices. On January 17, 1992 a share of MCD would have been available at a split-adjusted price of $10.06. Later that year, on September 17, 1992 a share of MCD would have been trading at a split-adjusted price of $11.19 per share. That’s a difference of over 11%! So, that means the investor that waited eight months to make up his mind on MCD shares paid a full 11.2% more for his shares. What a ripoff, right? Well, seeing as how MCD shares currently trade for $89.71 I think any dividend growth investor with a brain that is fully operational would be plenty happy with a cost basis of either price. This brings the point I made in the above article full-circle. When you’ve investing for the long-term, price swings of 3-5% today or tomorrow or the next day will have negligible effects on the values of your holdings decades from now. The key, as I’ve always said, is to buy high quality at an attractive price. The investor trying to catch the absolute bottom dirt cheap price on a high quality stock, or otherwise time the market, may get his reward, but may also miss out on dividend income that is compounding itself, or wait for a price that never arrives. If you’re investing for the next 40 years, your future self will most certainly thank the present-day you for making such wise choices as buying high quality dividend growth stocks; your future self will not, however, chastise you for not buying your $700 MCD shares for $85 instead of $90 per share.

I often say that I believe valuation is paramount to the long-term dividend growth investor. While I treasure qualitative properties over quantitative analysis, buying even the highest quality stock with excellent future prospects at too high of a price will lead an investor to sub-par returns over the near to medium-term until the stock catches up to the market’s pricing. Time heals all wounds, and it can certainly fix investing mistakes, but how much time you have is an individualistic question. So, while I practice a strategy that compels me to buy quality dividend growth stocks for the very long-term on a monthly scale, I do not recommend buying stocks if they’re trading at prices significantly higher than fair value (intrinsic value). If one truly cannot find anything attractively priced in the universe of high quality dividend growth stocks (a universe of no less than 100 stocks, and much more), then I actively encourage sitting on capital and waiting for opportunities to come to the investor. I haven’t experienced this yet in my still-short (3 years) investment career, but I may in the future. As I pointed out recently, the market, as an aggregate, is somewhat pricey and probably on the higher side of fairly valued. Again, I don’t buy the market – but an extremely overpriced market makes it very difficult to find attractively priced individual opportunities.

I’ve talked about valuation of equities and I’ve talked about investment horizons regarding the question at hand, but one other variable that’s important is how much capital you have to invest. As any blog readers know, I typically invest anywhere from $2,000 – $4,000 per month. This is up significantly from when I started this blog due to increased earnings at my day job, as well as rising dividends. This much capital allows me to make monthly purchases and quickly rebuild my capital base for sizable purchases the following month. If you have significantly more available capital than this then I can’t imagine how sitting on massive amounts of cash (that’s building quickly) will benefit you. However, if you have much less to invest with ($500 per month or so), then building up capital for a few months at a time would be best as you want to maximize your available capital to reduce possible friction costs. Also, if you make a purchase and the market quickly turns south it will be quite some time before you have enough capital to make the most of that opportunity. So, the amount of capital you have to work with will definitely affect the frequency of one’s purchases.

Another approach, which I might actively pursue, is to continue making monthly purchases but to also build a cash position/buffer slowly with which you can use if equities quickly move south and opportunities become extremely bountiful. This kind of approach would only be available to me if my income remains strong and I’m able to continue investing thousands of dollars per month while also funneling a few hundred dollars into cash each month. This way, if we get an annual significant dip in the market, like we did this summer or in the fall of 2011, there is a little “juice” in the form of spare capital above the usual monthly contributions, available to me to take advantage of the Mr. Market’s moodiness to whatever headlines win the day. Mispricing, in this way, would be most welcome.

As I mentioned earlier, I feel that qualitative analysis outweighs quantitative analysis. Qualitative properties, like management quality, the products and reputation of those products, brand names, historical operations, the economic moat of a business, R&D and scale of operations are all extremely important. Quantitative numbers, like the P/E ratio, P/B ratio, debt numbers, earnings and dividends are all used, of course, in evaluating a company, but I really like to look at where I think the company will be 50 years from now. A cheap stock with no future prospects is not cheap at all. I’d rather pay fair price for a company’s stock that has excellent chances for future success. After all, a company cannot continue paying rising dividends if there is no future growth for its earnings and cashflow.

It should be noted that I am actively adding capital to my portfolio for only 12 years, after which I plan to live off that dividend income and pursue opportunities other than paid full-time work. If you’re actively adding capital for decades and decades you can certainly be less aggressive with your purchasing frequency and the amount with which you add to your portfolio on a consistent basis.

I hope this article answered some questions on whether or not you should continue holding cash, waiting for the next market correction (that may come tomorrow or next year), or continue to use fresh capital to invest in long-term attractively priced opportunities and let that investment start compounding. I truly believe in most circumstances you should aim to invest as much and as often as realistically possible for your situation. On the other hand, I also think having a little capital on the side to take advantage of extreme opportunities would also be wise. If you have little capital it’s wise to limit commission fees and other transaction/friction costs and try to invest only when the transaction costs less than 0.5%. This may take a few months to build up the capital necessary to make the numbers work. But, as your portfolio builds the dividends will add up and your purchasing frequency can be increased. If you have large amounts of capital (on the order of multiple thousands per month), I strongly encourage a habit of regularly investing the money as any lost opportunity of a market correction can be quickly reversed with the fresh capital you’re regularly receiving, as well as using any cash position you have set aside for such circumstances.

In the end, however, I also believe that your savings rate will far outpace your investment returns. All this talk of investing in a stock today or waiting for an unknown price tomorrow is relatively moot if you’re only saving paltry portions of your net income. I truly believe that if you’re saving high amounts (50%+) of your net income and investing in high quality dividend growth stocks that are attractively priced for the long-term with great qualitative qualities you’re going to do quite well. Intelligent wealth building strategies, like saving a high amount of your net income, avoiding debt, investing regularly, minimizing unnecessary consumption and maximizing your income and are far more important than trying to nail down the absolutely perfect stock price.

So stop fretting over that $0.50 share price fluctuation and get busy being a part-owner of a high quality company. That company will make you back that $0.50 many, many times over if you stick with them for the next few decades or so.

How about you? You holding or deploying cash?

Full Disclosure: Long MCD, PM

Thanks for reading.

Photo Credit: FreeDigitalPhotos.net 

Comments

  1. says

    DM,

    I am in the same boat as you as I typically put new cash to work almost instantaneously ( except for dividends,for which I wait them to accumulate to my lot size of $2K currently. However, I do combine them with new cash adds as well.

    I also like the way you think about stocks – whether you bought MCD at the top or at the bottom in 1992 doesn’t really matter, as long as you bought it.

    The thing that is difficult about quality though, is that i sometimes think it lies in the eyes of the beholder. While you and I like MCD, someone else might think YUM is better.

    • says

      DGI,

      Thanks for stopping by! I appreciate the support.

      Absolutely. MCD, of course, was probably one of the better examples I could have possibly used…but regardless of the exact gains the point is still the same – buy quality, buy it at an attractive price point relative to intrinsic value and hold, hold, hold. Rinse and repeat.

      You are right that quality is in the eye of the beholder. That’s the subjective nature of qualitative analysis. INTC comes to mind as one stock that is particularly polarizing right now, but the subjectivity in investing can be seen almost everywhere. That’s why you have CNBC run stock picking shows 8 hours a day.

      Best wishes!

  2. says

    This is a good article. The way I think of it is the market can stay irrational longer then you can stay solvent. In our case a stock can remain over priced much longer then you would like.

    Let’s say you buy MCD at $80 with a PE of 20, or whatever metric you like to use, shiller PE or whatever. You don’t like to buy companies with PE over 16 so you move on to the next company. MCD could rise in share price to $120 and still have a PE of 20. Then maybe MCD stays at $120 for a year but finally hits your target of 16 PE. You’ve missed out on $40 of share price growth, due to the market staying irrational longer than you think possible.

    At the end of the day this is what I think, if you like a company, invest in it! With all the HFT, big money, etc. most stocks are pretty fairly priced. If you think you are smarter then the other millions of people investing, then great for you. If you like MCD, then buy MCD. There’s a really good chance the market will have MCD priced within 5% of it’s “real” value. And you may just lose out on a lot of gains waiting for that 5%, as the market will inevitable stay irrational as I pointed out in my example above.

    I, like you, invest instantly. The one thing I do since I am a little more aggressive is I will use margin to purchase stocks during big corrections, and as the market slowly rises from big correction I let my cash inflows buy off my margin until its gone, then I use cash to buy companies, and use margin on the next big correction.

    • says

      Took2Summit,

      Glad you enjoyed the article!

      Mr. Market can stay irrational for long periods of time, but I do believe that undervalued securities will eventually rise to their true value. This goes back to the “voting machine, weighing machine” theory from Benjamin Graham. How long the popularity contests run, however, is highly speculative and impossible to predict. I prefer not to try and guess exactly when this transition will occur and instead stick to buying quality at an attractive valuation, and if Mr. Market will continue to shun the stocks I’m interested then I’ll be a much happier man for it.

      Best regards!

  3. says

    DM, I have to admit I tend to hold my cash and practice selective deployment of capital (SDC) I like how that sounds ;-)

    Actually I do both. I do the DCA through my 401k at work. But in my taxable account I’m slower to allocate funds. I don’t disagree with what you are saying, I find it quite acceptable. My main reasons for holding cash is twofold. First, total return. I believe that by waiting for opportunities to arise an investor is more likely to earn a better total return. The second factor is closely related to the first: margin of safety. By making purchases at fair to undervalue you have more of that margin of safety Graham also talks about. For me this is important as I can never rule out the possibility of being wrong about the future prospects of a company’s earnings potential. Buying low allows me to weather the storm of a few missed earnings reports.

    I guess the last thing would be the opportunity costs you mentioned. If I’m patient and accept that from time to time the market will behave irrationaly towards quality companies then I could more than make up for the dividends I lost through price appreciation.

    At the end of the day I’m left with this: there are many means to the same end…

    • says

      The Stoic,

      I completely agree with you.

      “I believe that by waiting for opportunities to arise an investor is more likely to earn a better total return. The second factor is closely related to the first: margin of safety. By making purchases at fair to undervalue you have more of that margin of safety Graham also talks about.”

      That’s the right way to do it. I’ve just continued to find available purchases at fair to undervalued prices over the last 3 years and I’ve deployed cash on a monthly basis because of it. If I were unable to find attractive opportunities I would just build cash until something was in my “strike zone”.

      And yes, there is definitely many means to the same end. And, with our end being a successful investment career – I wish us both the best of luck!

      Take care.

  4. says

    DM, I was practicing this method and putting my cash instantaneously into stocks, but later realized that it didn’t work well to me and thus I decided to hold cash in my account (currently I decided to hold 30% in cash). The reason is that among a pool of stocks some may offer a better deal and when that happens you suddenly have no cash. For example I wanted to buy SDY, but when it was low I had no cash, and the stock went up. Should I chase is knowing that one day it will correct from current levels? It reached a major resistance at this point and it may reverse (even if a minor reverse, it still would be better than buying now). So I decided to wait, the train left the station already. Meanwhile GLD went under sell off and currently it offers a lot better opportunity than SDY. So I bought GLD instead and saving further and waiting for my other stocks to correct (buy dips sell the rips, I am not selling, but buying dips). Another reason for holding cash is that I want to be selling covered calls and cash secured puts. In case of potential roll overs, you need some cash to do that. I went thru investing all my cash immediately approach and it didn’t work much to me seeing many great trains leaving the station without me, because I just bought a stock, which then retreated and corrected for several weeks.

    • says

      Martin,

      You definitely have to do what works for you. There is certainly no universal investment strategy that works for everyone. If you find holding a large percentage of cash works, then I say continue to do that.

      I don’t think there is any right or wrong. As long as you calculate the opportunity costs to holding your cash and are able to snap up opportunities at a commensurate rate, then go for it!

      I personally find I like to always hedge my bets. I like to invest cash fairly often into what I feel are quality long-term attractive opportunities, and then try to build a little cash on the side for extraordinary events.

      Please keep in touch.

      Best wishes!

    • says

      DM, I used to do the same, as I said, but many times an opportunity showed up and I was without cash and mad. Although I am practicing having cash on my account recently (thus I still do not have my goal of 30% yet) I decided saving when the market is rising and everybody is crazy about stocks. When everybody starts panicking then I start looking on opportunities to buy. These days, when the market is tanking (actually was tanking and maybe we are right in front of a possible pullback) I was able to buy some shares cheaper than when I would be buying if I had deployed my cash right away. Next thing is I really need it for my option trading. I have a few good trades in my watch list ready to pick up, but do not have enough cash to open a trade. Just my experience and maybe it won’t work for me. Time will show.

  5. says

    I’m deploying cash, and will continue to do so as long as there are reasonable values to be found. I would like the market as a whole to cool off by 10-20% to make it easier to find good values, but we can’t always get what we want.

    In my view, a decent solution is to get the best of both worlds by selling puts on a 6-12 month time period. Sometimes I buy stock outright, and sometimes I enter positions by selling puts and getting paid to wait for a better stock price. That way, the secured cash gets a high single digit or low double digit rate of return while it sits there waiting for share prices to drop a bit. So at any given time, I’ve got a large holding in the market, and a smaller pool of cash earning good returns ready to jump in should prices fall a bit.

    • says

      Matt,

      I couldn’t agree more. Your keen eye for quantitative analysis is extraordinary. I also would like to see a cool off market-wide of about 10-20%, but we may or may not see it. If we do I’ll use a little extra juice in the tank…if not I’ll continue to operate as normal and build positions in what I feel are some of the stronger values available.

      I haven’t yet explored options, but I may do so yet. It seems you’ve been able to successfully incorporate that into your normal long investment strategy. You can hold cash in that way earning a pretty good return, and if certain positions (that you were already interested in anyway) fall in price, you get to go long at a lower price than what was available at an earlier date. Good stuff.

      I do hope the market gives us what we’re wishing for!

      Best regards.

  6. says

    One risk of looking for dips that few people ever discuss is buying on what looks like a dip, but is really a long downward trend. Thats why I tend to just buy the company I like, and not worry so much about the price…OTOH, being able to buy a few points cheaper can have a big impact on your returns. As far as buying with 500 or less, I have done this many times, and part of the reason is just to get it out of my bank account where I might be tempted to spend it. Its a silly reason, because Im pretty disciplined, but I know once I have it invested, I am very very unlikely to uninvest it, barring a real life threatening emergency.

    • says

      HYS,

      Very good point there. It’s hard to tell if a 3-4% drop in a stock you’ve been watching is the start of something more sinister or if it just represents a great buying opportunity. Because of this, I always like to build my positions over time. I will only make big bets and really commit as much capital as possible to one company if I feel the opportunity is extraordinary. The last time I was fairly aggressive with one particular company (where I bought as much as I could, as fast as possible) was AFL when it dipped to the low $30′s. Other than that, I’ll buy on a dip…and then if it dips more I’ll buy some more. I always like to hedge my bets and try not to try and predict where things are going.

      Best wishes!

  7. says

    Your idea of making regular monthly purchases while slowly building up a cash buffer is an idea that I have also considered recently. Every so often I find myself in a situation where a great deal suddenly arises (e.g., a stock plunges on an overreaction to earnings) but I do not have enough cash on hand to make a purchase.

    To limit those missed opportunities, I am considering the following approach starting in 2013: With savings and dividends, I will probably have around $1,600 per month to invest. I could make regular monthly purchases of around $1,400 and have the remaining $200 reserved for sudden opportunities. Every six months or so, I would have enough in reserve to make a fair-sized purchase if a great opportunity were to arise.

    This represents a sort of compromise between deploying and holding cash: I would be deploying cash on a regular basis, but holding a bit in reserve for special opportunities. As I mentioned, this is something I will likely be more disciplined about doing in 2013.

    • says

      DGM,

      I’m with you completely. At that capital level ($1,600) you have a fantastic idea there and I would be doing the same exact thing. Invest a large portion of it, and enough to where the commission/transaction costs are 0.5% while still leaving yourself with a little juice in the tank for the possibility of a bigger opportunity later. That way you’re not really over-committing to any either fully deploying cash or holding cash.

      This is something I’m starting pretty much immediately. The amount I invest and save for later opportunities is not quite as fixed as you, as my income varies quite a bit. However, I’ll continue to do what I’ve been doing while holding a little cash back just in case I see something I can’t pass up and need the capital.

      I think as a portfolio grows, it makes it easier to a bit less aggressive with the cash. As one is building the portfolio, it takes as much capital as possible to get the thing off the ground and running. Once it’s humming along it’s certainly easier to be a bit more conservative with capital deployment. A larger portfolio also generates larger dividends which starts flooding the coffers with cash, which adds to your flexibility.

      Best wishes!

  8. says

    I’m holding way too much in cash right now. I’ve been finding it tough to get good values out there. And I’m that guy waiting for a pullback that may never come…a weakness, I know.

    I like the historical MCD analysis and your point is very valid. The thing that is most exciting about this investing game (to me) is not how much money you’d make from buying/holding MCD for a long time – but rather if you would have been better buying MCD or PEP and holding for a long time.

    • says

      Headed Home,

      I’ve already made two purchases this month. I bought INTC earlier in the month, and also added to one of my positions yesterday. I think great opportunities are always right around the corner.

      MCD looks to be the winner going back to 1992…but they’ve both been fantastic stocks to hold. I’ll continue to hold both unless one gives me a strong reason to sell.

      My strategy in a nutshell: I try not to pick winners. I just try and stay away from losers.

      Take care!

  9. says

    “When’s the right time to invest?”

    Instead of trying to time the market I think it’s a good idea to spend some time valuing stocks and setting buy prices. Waiting for a stock price to hit your target is not market timing. I’ve also discovered that it is necessary to reevaluate over time. I have some old buy prices left from a watch list I used a couple years ago. It’s way out of date now. For example I had a target on KMB for $64 and PM at $62. It was realistic at the time, but good luck getting those prices these days!

    I have been using the method you describe of making monthly purchases, but simultaneosly building cash reserves. That way I can increase my income every month yet be able to deploy increased cash at opportune times. I try not to let it build up too much so sometimes I feel the urge to reduce the stockpile.

    I think rushing out and buying up everything in sight as soon as the money hits your account is silly. Having a massive cash reserve is also counterproductive since money market funds now pay next to 0% while you wait. Not too long ago MMA paid fairly decent yields. The opportunity costs are very high this day in age. It has NOT always been that way and may change in the future….

    Heres some data I found on average MMA rates. 1980: 12.7%, 1990: 7.8%, 2000: 5.9%, 2012: .02%

    • says

      Compounding Income,

      PM at $62! I’d love that. We may yet see it with all the bad news circulating increasing regulations abroad.

      I agree with you on setting buy prices. I think once one becomes fairly familiar with a rather small universe of stocks, the familiarity with the stocks, their price ranges and the way they behave becomes somewhat second-nature.

      Good info on the historical MMA rates. You could also post 30-year treasury rates and be equally awestruck. Of course, dividend yields (S&P 500 average) were significantly higher back then as well.

      I agree. The opportunity costs are high right now. And buying stocks as soon as cash hits your hand is not a smart strategy, unless of course you just so happen to come into ownership of capital at a time when the market is presenting significant opportunities. As always, valuation is paramount.

      Best wishes!

  10. says

    Dividend Mantra ! Nice exposé ! I have as much cash if not more than stocks now, and am i no hurry to invest it too quick. The market in general is way overvalued in my opinion, and looking for bargain prices in dividend stocks is hard these days. The market drop in 2008 was really scary and I saw many of my holdings melt like ice in the sun. Every 4 to 6 years the US market is subject to big drops, 2001-2003 2007-2009 . Add 6 years to 2001 and 6 years to 2007 and you will know what I mean: 2013 and 2014 may well be scary years ! Thus I am in no hurry to load the boat, neither intend to sell any of the dividend growth stocks I bouhgt of late. Waiting to have the market in the Buffet’s range of 70 to 80 % of GDP interest me more now. Maybe I am right and Maybe I am wrong, but I like to sleep peacefully.

    One thing that I really do not like is the Quantitative easing 3. It is diluting the Dollar value, fill the banks with cash that they do not want to lend. Banks must be in a very bad shape for the Fed reserve bank to buy so many Mortgage backed securities ! Increasing the Fed’s balance sheet by one trillion dollars per year is not a good sign for a real recovery. Like a drug addict, the economy will need ever more of its sugar dose.Of late it has been deflation time, reason why I suppose the fed is pumping endlessly. But even Warren Buffett said that he would have liked the fed not to embark on QE3.

    good to you, happy X-mas too.

    • says

      Aspenhawk,

      I’m with you. I’m not a fan of QE, and the third round (to infinity) is just really souring my palate. I wrote about my distaste for the Fed’s decision a while back. It’s really unfortunate.

      You have to sleep at night. If you feel that the stocks you’re interested in are overvalued (priced above intrinsic value) on a quantitative basis, then it’s best to hold and wait for a better price point. I encourage holding cash if no attractive opportunities present themselves.

      I have not yet run into such a scenario yet, but if the market continues this rise I may yet cross this bridge. We shall see.

      Take care!

  11. says

    I deploying cash when I can and when it worth it. Right now I have only 0.05% in cash, all the rest is invested and my last buy was from today (the last one for 2012) into a good undervalued Canadian company.
    Since there’s many irrational behavior in the market right now, and that perhaps 2013 will follow the same pattern than 2012, there’s always a bargain to make into a divi stock :)
    Also, the more you have stocks, the more you have chance to have one or some of these that you can sell at good price to have the ability to put the return into a new bargain, and so on… It can counter-balance the lack of cash when it’s needed.
    I think that stock price is important in term of valuation, I wouldn’t pay too much for an overvalued stock.

    Best wishes for this end of year :)

    • says

      JF Baconnet,

      “I think that stock price is important in term of valuation, I wouldn’t pay too much for an overvalued stock.”

      Absolutely. That’s really what this article boils down to. If you find a stock that’s high quality, has good future prospects and is trading at an attractive valuation that provides a margin of safety then it’s probably best to just invest your money instead of waiting for an even better price that may never come. I liken it to opening the door when opportunity knocks. I’d rather not find out how many times he wants to knock. If the stock goes down even further, then it’s an even better opportunity and I would invest further if the fundamentals are unchanged.

      If, however, you’re unable to find any attractively valued stocks, then the opportunity cost of holding cash is most likely negated or even trumped by the potential losses of investing in an overvalued security. Holding cash, in this case, would be prudent.

      It all comes down to valuations.

      Take care!

  12. says

    Like you I typically put any cash available in the market as soon as I can. The only reason I wouldn’t do that is if I felt I couldn’t find a single security that I was interested in trading at a fair price (in other words everything is ridiculously overvalued). Fortunately, every time I’ve had money ready for a purchase I haven’t had any trouble finding multiple opportunities of companies I believe to be fair or even undervalued.

    • says

      Dan Mac,

      I also have had a hard time not finding attractive opportunities every single time I’ve had available capital with which to deploy. Of course, this can change…and I’m okay adapting to a fluid market.

      In the meantime I always try to keep perspective. It’s wonderful to be in the position where we even have to wonder what to do with spare capital. There are many people out there that barely have enough to get by…or worse. I’m grateful to be in the position I’m in.

      Best wishes!

  13. says

    I like to try and get money working every month. Although I probably need to start funneling a small portion of my monthly contributions to building up a cash reserve in case there’s some random pullback that gives some short-term opportunities so I’m not kicking myself for not getting the chance to buy. It’ll be interesting whenever the opportunities become less plentiful once the economy fixes itself. That will be when it becomes much tougher to decide whether I should continue making monthly purchases or build up cash. I guess I’ll cross that bridge when the time comes. Although there’s always unloved stocks in any market. Then the question will be whether to add to existing positions even though they might not be the best values or do you start new positions, because I don’t want to have a full time job of just keeping up with the companies I’m invested in. Thanks for the great article.

  14. says

    Pursuit,

    Sounds like a sound strategy to me – investing fresh capital into attractively valued stocks, while still building cash on the sides to take advantage of particularly strong opportunities when/if they arise.

    As a portfolio grows and as new positions are initiated the time necessary to monitor everything grows. The amount of time that’s necessary depends on the nature of the businesses and the nature of the market at any given time. Focusing mostly on blue chip large cap stocks allows a little more flexibility in this department. If we were investing in risky small cap startups I believe we’d be spending a lot more time on monitoring our businesses.

    Take care!

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