Current Difficulties In Allocating Capital

S&P 500 6-month chart

What is a value investor to do right now? 

The S&P 500 is up 14.55% so far in 2013. 14.55%! And we’re not even five months into the year yet. Crazy, right? Not really.

We’re currently in a low interest rate environment as The Federal Reserve continues to keep interest rates down to spur lending and growth so that the economy can kick into gear again. This means that savings accounts yield almost nothing and even high quality bonds like 10-year Treasuries only yield 1.9%. That 1.9% isn’t going to get you very far and likely is going to lag inflation, meaning you’re going to lose purchasing power over time leading to a nominal negative return. Loss of real capital is not something many of us investors are keen on, so where else does one invest their money?

I’m obviously bullish on stocks over the long term, as you can see by my unflinching high allocation to dividend growth stocks (currently bordering on about 95%). Let me rephrase that. I’m bullish on high quality businesses over the long haul. I’ve discussed exhaustively why I’m so bullish on high quality companies, but it comes down to this: a high quality business can typically generate excellent returns over time due to the strength of the underlying business, which usually includes brand name products or services, loyal customers or clientele, economies of scale, diverse geographical operations and a commitment to shareholder returns.

I love the stock market. It provides a guy working a regular, middle class job like me access to equity in some of the best companies in the world. I’m now a part-owner in high quality companies like PepsiCo, Inc. (PEP), Johnson & Johnson (JNJ) and Chevron Corporation (CVX). These are fantastic companies that have global operations and sell products that people all over the world buy every single day (food, medicine, gas & oil). But even the highest quality company can become too expensive, leading to subpar returns over the long haul if purchased at too a high a price. I find that we’re near a juncture like that right now with many great companies, much to my dismay.

For instance, Johnson & Johnson (JNJ) trades at 23.34 times earnings using trailing twelve months earnings. Now, I’m a huge fan of this company. It’s the largest diversified health care company in the world and it’s one of my biggest equity stakes. But I believe that paying over 23 times earnings will likely lead to returns that are unspectacular over the next 2-3 years. EPS will have to catch up to this valuation as I don’t see how investors will continue to bid up these shares much beyond current levels. That means the price will likely stay static while the earnings catch up bringing the stock back into a normal valuation in the 15-16 times earnings range. Or, the P/E ratio can compress (price falling) which will also lead to a P/E ratio that is more attractive for this company’s stock.

It should be noted that I didn’t purchase my JNJ shares to hold for 2-3 years. I bought my JNJ shares to hold theoretically for the rest of my life. To be completely honest, I don’t care if P/E compression occurs and the price falls or if the price stays static for the next few years while earnings catch up. This doesn’t really concern me because I’m buying JNJ shares to be a part-owner in the business itself and share in the profits the company generates via dividend payouts. I purchased my shares simply to access a portion (typically 40-60%) of profits on a per-share basis. The share price means little to me unless it falls to a level where I’d be interested in increasing my stake in the company, or if it rises so substantially and ridiculously that keeping my equity stake would be an unwise allocation of capital. What I do care about, however, is whether or not JNJ continues to pay out its hefty dividend (currently $0.66 quarterly per share) and whether or not the company continues to raise that dividend on an annual basis.

This brings me to the real crux of the issue right now. I purchased my shares in JNJ to gain access to a portion of profits in one of the highest quality businesses in the world. But access to those future profits in the way of dividends means giving up capital now, and capital doesn’t come easy. Succinctly, if I’m going to give up my hard earned capital I want to make sure I’m getting the best deal I can for it. Just like when I’m shopping for food, gas or clothes paying less is always better. This is never truer than when dealing with stocks and right now deals are awfully hard to come by. I plan on retiring by 40 years old by living off the passive income my portfolio generates, so it’s in my best interest to build this portfolio up as quickly as I can to let the compounding snowball work its magic. However, the power of a compounding snowball rolling downhill can be slowed dramatically if you’re starting up the hill higher than you need to. And right now, I believe that shares in many high quality businesses are higher up the hill than they really should be due to the low interest rate environment we’re in, forcing investors to climb ever higher to reach for yield.

And that means us value investors either join ‘em because we can’t beat ‘em, or we stay smart and continue to wisely allocate capital in all market conditions. I’ll always prefer the latter.

Right now, I find myself at a point where I find few assets more attractive than stocks, but stocks themselves being unattractive in general as an aggregate. It’s almost like comparing a punch in the face to a knee to the groin. I’d prefer the former, but only because the latter is so unattractive and the choice is limited between the two.  

Bonds are very unattractive right now with very low yields by almost any historical measure you can throw at them, let alone the threat of inflation dragging on your return. Interest rates will eventually rise and when that happens current bond prices will fall, as new bonds become more valuable with higher yields. Gold? Other than being shiny, it does nothing. It certainly doesn’t produce cash flow. Real estate? Physical real estate is attractive right now in my opinion, but the problems are the illiquid nature of it, difficulties in diversifying due to cost, high transaction costs and geographical risk. Purchasing a rental property might be intelligent right now if you’re interested in becoming a landlord (not sure I am). REITs are the easy way to go here, but due to their attractive yields they’ve been bid up like everything else leading to expensive prices and unattractive valuations. Cash? No return over the long-term, but this might be one of the most attractive assets of all right now due to the relatively expensive alternatives. I’m not a fan of cash, however, as it’s one of the worst assets over the long haul on a return basis (negative due to inflation) and this is why I have under 5% of my wealth in it. However, capital is obviously quite attractive in a situation where markets are falling and one can pick up cheaper stocks with readily available cash.

While I continue to stay away from valuing the market as a whole, I don’t see much value in individual high quality businesses like The Coca-Cola Company (KO) at 22 times earnings, General Mills, Inc. (GIS) at almost 19 times earnings or The Southern Company (SO) at almost 20 times earnings. There’s just very little (if any) margin of safety to be had with names like these.

So, I’m doing a few things right now. First, I’m not selling anything. I believe in being a part-owner in high quality companies and collecting a portion of the profits. Fluctuations in prices don’t deter my resolve. Second, I’m allocating a higher percentage of my wealth towards cash right now. I typically have 5% or less allocated to cash due to the unattractive nature of it, but I find it a prudent move right now to build cash with little value to really be had in the high quality businesses I want to be a part-owner of. Third, I’m focusing on sectors that haven’t performed as well as the aggregate like the energy and technology sectors. I currently like names like Exxon Mobil Corporation (XOM) at 9 times earnings and Cisco Systems, Inc (CSCO) at 12 times earnings.

In summary, I believe us dividend growth investors would be wise to do what we have always done: focus on value and quality. I love both but would never sacrifice one for the other. Certainly the dividend, and growth of it, are very important but it’s just one aspect of a company’s fundamentals and quantitative aspects. I take great pleasure and pride in building my portfolio and the passive income it generates, but what sense would it make to invest in a company that pays a dividend equating out to a 3% yield based on current market prices, only to watch the share price fall 5%? I’m certainly not advocating market timing in this article, but what I am advocating is to be mindful of valuations and focus on high quality. Don’t gravitate towards a stock just because it’s cheap in an expensive market, and don’t buy high quality whilst being unaware of the valuation.

How about you? Are you having difficulties in allocating capital currently?

Full Disclosure: Long JNJ, PEP, CVX, KO

Thanks for reading.

Photo Credit: Yahoo! Finance

Comments

  1. says

    There isn’t much value out there at all right now. I’ve got a limit order out for CVX which hasn’t kicked in because the price refuses to drop to what I’m willing to pay. If the market stays stuck where it is for long enough and sufficient capital builds up, I’ll start looking into using puts to enter into a position at a lower cost basis.

    • says

      MFIJ,

      I’m with you. Not much value to be had, and the little value I see isn’t particularly exciting. I see some stocks in the energy sector that haven’t run up with the broader market, but they don’t have much of a margin of safety either.

      We’ll see what Mr. Market gives us as we progress throughout the year. He’s famously moody!

      Best wishes.

  2. says

    Unfortunately the market’s huge run up has coincided with my higher than average income. So I’ve had a bunch of cash but no really stunning places to put it. I’ve been leaning a bit more towards growing the cash and selling puts to collect some kind of return on a portion of my capital. But even that’s been slowing down some, last week notwithstanding since I sold 2 puts on CSCO.

    It’ll be interesting to see what XOM does with it’s dividend to share buyback ratio. On a total yield basis they’re one of the best, combining dividend yield + share buyback, but on just a dividend yield level they’re pretty far behind CVX. I want to get exposure to both companies in the future, but CVX is too high for me right now and XOM is a decent value. But the yield for XOM isn’t quite there yet. I’d love to see it creep up closer to CVX’s but I guess that’s the quality premium right there.

    It’s definitely been tough on DG/value investors so far this year. I can’t believe that we’ve gotten that kind of return through less than 4.5 months. Ridiculous!

    • says

      Pursuit,

      No stunning places to put cash is a good way to put it. Certainly I see some high quality companies that have stock that isn’t trading at crazy valuations, but the valuations are not particularly compelling either.

      XOM is a great company, and their scale is particularly attractive. The yield isn’t quite as high as some competitors, but the valuation is attractive relative to the broader market.

      I’m going to remain more patient than usual. I’m not trying to time the market, but I do aim to buy high quality at the right price.

      Take care!

  3. says

    Not many values to be found. Only found SAFT which is growing rather quick. Thanks to remind me of XOM, will have a look at it. As to CSCO, I really do not like to invest in technology, as there are too many uncertainties. I’ll just hold my stocks for now. Warren said you do not make money being in and out of stocks, and that when you have a farm, you just do not sell it while it makes you money and that you do not look at the weather forecast everyday. Take care.

    • says

      Aspenhawk,

      I don’t blame you for shying away from technology. I purposely underweight technology in my own portfolio as I’m rather averse to investing in tech companies. I am simply not intelligent enough to understand all the ins and outs of many of these companies. That being said, I’m willing to at least try and I aim to stick with giant tech companies to mitigate some of the risk.

      Well, Warren has also said that some of his best investment decisions were not doing anything at all. Sometimes there just isn’t anything to do with the capital and it’s best to build it up until the right opportunity comes along. I find myself at a juncture like that right now.

      Best wishes!

  4. says

    Likewise, it has been pretty tough for me. Since I am just starting a specific DG portfolio, my goal of some simple diversification has been hamstrung by the lack of good value! As a result I am a bit overweight with holdings in just a couple sectors. Long-term, I’m not worried by this short-term diversification problem, but it is definitely something I am monitoring.

    • says

      w2r,

      Don’t worry about your sector weightings being off. To be honest, I don’t really look at sector weights in my own portfolio. I know that I don’t have a big allocation to technology and I know that I have quite a bit of capital invested in consumer stocks but that is just my natural investment tendencies and sticking to a circle of competence rather than some purposeful sector weighting.

      Don’t worry, opportunities will always present themselves. The key is to be ready when they do!

      Best regards.

  5. says

    I have a lot of cash sitting on the sidelines. I tend to wait for a stock on my watchlist to have a bad quarter (like PG did) and buy on the dips. I am looking at smaller cap companies with a moat such as Western Union (WU), which is currently implementing a new business plan. Decent yield and low P/E but the stock price is running up with everything else.

    • says

      Second Half,

      I wasn’t aware of a new business plan for WU. Can you elaborate on that a bit? Last time I looked at WU I just didn’t see a lot that really compelled me.

      Nice job building up some capital and waiting for opportunities to present themselves. I’ve been rather aggressive through the first four months of the year but I’m going to scale back on purchases for the near term. We’ll see what happens!

      Take care.

    • says

      I became interested in WU when I was In Portugal in March. The local office in Lisbon had the best exchange rate by far. Apparently, management is looking at revamping electronic transfer payments and had lowered pricing in Mexico which led to a large drop in stock price at the at the end of last year. Management is calling 2013 a “transition” year as they attempt to increase capabilities in the business to business sector. They have an unparalleled network of affiliates which gives them a kind of moat that cannot be easily replicated. They appear to be committed to shareholders. This is all from the top of my head. I can forward more concrete information if you are interested.

      I really appreciate that you attempt to reply to every commentator on your blog. Good luck.

    • says

      Second Half,

      Thanks for the information on WU! Wasn’t aware of the commercial expansion plans. Something to definitely keep an eye on. I’ll have to look a bit further into this business.

      Thanks again!

      Best wishes.

  6. says

    I agree with you that it’s getting harder and harder to find decent values in dividend stocks. Also agree with your decision not to sell any current positions. While many of the solid companies most of us dividend growth investors own are overvalued right now to the point we don’t want to buy any new shares, I don’t feel they are so outrageously overvalued that we should be selling out and locking in gains.

    Portfolios for long term investors will flow up and will flow down. Currently we are in an up cycle. Eventually prices will flow back down and there will be more opportunities for us to invest. The best we can do is exactly what you are doing. Keep your portfolio intact. Invest in any fair or undervalued opportunities you can find. And have patience on some of the other companies you’d love to be purchasing until prices come back down (which they always do).

    • says

      Dan Mac,

      Patience is definitely key when the market is in a state of euphoria. Mr. Market is famously bi-polar and right now he’s manic. He’ll one day turn depressive and I plan to be ready for such a time.

      In the interim I’ll continue to collect my dividends and smile! :)

      Best wishes.

  7. says

    This article brings up a lot of great points. Unfortunately I haven’t had any money to invest the past few years (outside of normal 401k contributions), but I will start to have money to invest in the next few years (finally debt free). I’m hoping the market continues to increase, but I know that it can’t keep up this pace. For that reason, I’ll probably keep more in cash than normal just like you’re doing.

    • says

      Jake,

      Congrats on becoming debt free! You’ve got me beat in that regard. I do hold some student loan debt from my college days, and I only keep it because the interest rate is very low and it’s tax deductible. It’s also flexible – if I lose my job I can go on an income based repayment plan.

      Best of luck as you build your capital supply!

      Take care.

  8. says

    I just wanted to remind you real quick that the market prices stocks based on future earnings, and future projections, not on past earnings. If the whole market was based on the past it would be a lot easier :P

    The reason I mention this is while JNJ has a 23 PE like you mentioned it has a very reasonable 14.84 FPE which is the important number. the whole market prices, or tries to, the future, not the past. and JNJ’s 14.84 FPE is much closer to its historical average.

    • says

      Took2Summit,

      Hmm, I’m not totally sure about “the market prices stocks based on future earnings”. The market prices stocks based on many factors, including supply and demand, earnings, natural disasters, commodity prices and so on and so forth.

      The market can value a stock however it wants. But the key is for you to value a stock based on a set of criteria that you find reliable and accurate. I don’t typically use a forward P/E because you’re using numbers that are guesstimates and have not yet come to pass. Using a true P/E on a TTM basis gives you apples-to-apples comparisons across many stocks as you can actually compare prices to recent performance. Comparing prices to what different groups of analysts predict is not really an apples-to-apples comparison, in my opinion.

      JNJ typically trades for a 15-16 P/E on a TTM basis from what I can tell, so it is expensive on a historical basis.

      I don’t think JNJ is priced into the stratosphere here, but I can’t see how it would continue to be bid up much from where it currently sits. I obviously plan on holding shares forever, so I don’t think I’d be disappointed 20 years from now if I bought JNJ at today’s prices, but I’d much happier if I could get it for an attractive price with a margin of safety built in.

      I recently purchased JNJ before its recent run-up and thought it was attractive in the mid-$70’s.

      Best wishes!

  9. says

    I feel your pain, DM. I too am struggling to find attractive opportunities to place my hard-earned cash. Meanwhile, I have been rolling my savings into my cash stockpile which is now approaching 25% of my net worth.

    I have also recently diversified and ventured into the world of P2P lending with Lending Club which I’m using to mimic bond holdings in my portfolio. I have practically no bond exposure now, and I wouldn’t touch them with a 10 ft pole with our current interest rate environment.

    • says

      Net Worth Snowball,

      25% in cash? You are ready for whatever comes your way, my friend. I’ve never wanted to have that much cash and would probably have to stop buying stocks for about a year to build up a cash stockpile that big, but a market correction would be music to your ears. I hope for both our sakes that occurs!

      I see P2P becoming more and more popular. I was a bit leery of the tax side of it when March rolled around, but I remember MMM made it sound like it’s not too bad. It’s something I need to really look into!

      Best regards.

    • Andy says

      Same boat here. I’m giving Prosper a try since Lending Club isn’t available where I live, but figured since the return prospects are so poor elsewhere (as you and the commenters have described) that I might as well give it a test run. I threw in just a small chunk of my available cash and used the MMM approach of a widely diversified set of loans with small investments in each. It’ll be a while before I really see results, but it’s at least something to keep me occupied so I don’t foolishly buy overpriced stocks. I’m also using this as a time to really focus on getting my monthly expenses down to increase savings and reach FI sooner.

    • says

      Andy,

      Great idea to take this time to focus on other things than buying stocks. Paying down debt, investing in other assets or focusing on increasing your savings rate are all great places to place attention on. It’s difficult to really find better asset classes than equities right now, but real estate could be one depending on how well you can apply yourself.

      Best of luck out there!

      Best wishes.

    • says

      Pretired Nick,

      I remember that you wanted to sell a place and use that cash to start up a stock portfolio. It’s unfortunate that the market has gotten so hot, leaving you with little opportunity.

      I think more than just the economics I’d have to think long and hard if that was something I really wanted (physical property/being a landlord). Economics aside I just don’t think owning a rental property is really for me, even if it means sacrificing some return. I’m perfectly content to let high quality companies earn a high ROE and send me a check!

      Best wishes.

  10. Spoonman says

    Indeed, this is a very challenging environment for the serious DG investor. I still have my eye on APD and I’ve been putting some money in DLR. Everything else has been going up relentlessly. Even Apple has been going up lately. I loathe to sit on cash for too long because it doesn’t do much on its own. With Uncle Ben not letting off the QE pedal we might not see good prices until 2015.

    • says

      Spoonman,

      APD was one of my last purchases. I thought it was attractively priced and was even interested in doubling down, and then it ran up on me. Too funny!

      Not much to look at out there. Many of the Canadian banks have gone nowhere YTD, so I might increase my position in BNS or TD. Or initiate a position in RY. WFC is also attractive, but I’ve already got a fairly sizable position in the company. We’ll see!

      Best wishes.

  11. Onassis says

    This is a crazy time! Mr. Market goes up, and up, and even more up…
    Good question: What can we do with our money?

    At the moment I calculate the “Payback Time” from Phil Town for a lot of companies.
    For example BHP Billiton has a payback time about 8.1 years, Reckitt Benckiser has a payback time about 9.1 years.
    Than I decide me for BHP.

    ALL companies are very expensive!
    But now, on the basis of the payback time, I now which company is better rated than others. And then I buy the company with the lowest payback time.

    Best wishes
    Onassis

    • says

      Onassis,

      I’ve seen some investors use some kind of payback time metric, either using just dividends, or some kind of dividends and capital gain combination. Definitely an interesting exercise!

      I’m with you on focusing on the cheapest companies available. The market as an aggregate is pricey here, but certainly there are cheaper stocks than others. The key is to focus on valuation and quality.

      Good luck shopping!

      Best wishes.

  12. says

    I’m with you. My cash is building up and I don’t have any attractive place to put it. I’m not a huge believer in market timing, but I do think there is some profit to gain and/or some losses to dodge by being smart about market conditions.

    For now, I’m not buying stocks and am instead building up cash. I feel good in that I’m benefiting from the stock market rise as I have 75% of my wealth in stocks, but am sitting with 15% or so in cash. If and when the market dips, I’ll be ready to purchase some stocks on sale. If it doesn’t drop, then I’ll keep building portfolio value.

    Will I purchase more in the near future? Probably not unless there is at least a significant market correction.

    All in all, I’m thinking the same thoughts as you, as I’m sure we all are.

    • says

      Kraig,

      Thanks for stopping by! Looking forward to our meet-up!

      I’m completely with you. I never advocate timing the market, but at the same time I don’t believe in buying expensive stocks just to do it – without really thinking about it. I’ve been purchasing equity positions in high quality stocks almost every single month since I started this journey in 2010, and this is the first time in three years I’ve thought about slowing it down a bit as I just don’t see much value. So, obviously I’m not a market timer.

      I’m with you. I’ll keep collecting the dividends that my equity ownership stakes provide me and I’ll also keep collecting the paychecks from my day job. It won’t be an ‘elephant gun’ like ol’ Warren Buffett, but I might just end up with a small pistol to go hunting with!

      Best wishes.

  13. Anonymous says

    Hey Dividend Mantra.

    This is Tim McAleenan. I’ve written some articles on Seeking Alpha, and interacted with you a few times there I believe. Anyway, I wanted to stop by because I owe you a huge apology. I read one of your posts a couple months ago, I thought the post was simplistic, and never came back.

    Whoa, whoa, whoa, was I wrong. I have no idea what must have been in the water that day, but I’ve spent the past 3+ hours pouring over your blog, and to say I am impressed would be an understatement. I’m in awe of what you are doing here. You have clearly articulated goals, you follow your dreams irrespective of what others have to say, and you lay out the step by step process of achieving them. That is awesome in every sense of the word, and I applaud your courage.

    Anyway, I wanted to stop by and offer a huge apology for getting the wrong impression about your blog. I should have been reading you every day for the past couple of months, and I have no idea what got in my mind. If it’s any consolation, I’m your newest groupie. As far as I’m concerned, you are one hell of a good role model.

    Your articles are a joy to read, and I love your strong spirit. Keep on doing your thing.

    Peace, brother.

    -Tim

    • says

      Tim,

      Hey, thanks so much for stopping by!

      I really enjoy your writing over at Seeking Alpha, and do look forward to reading your articles. It’s a big honor for you to stop by and offer up the support. I really appreciate it!

      Glad you like some of the content. I do my best to maximize every opportunity – be it saving or investing – and then provide inspiration to others to do the same.

      Glad to have you as a groupie! :) I know we’re both fairly young investors and pretty keen on Buffett and Munger, so it’s great to have someone as like-minded as you enjoy what I’m doing.

      Again, really appreciate the support. Your work inspires me and I hope I can return the favor.

      Best wishes!

  14. says

    It is reassuring to see other investors in the same boat as me – stalemated by the current run-up of the market. Patience is king!

    • says

      Pacific,

      I’ve been a bit stymied lately, but I’ll continue to stay patient and sit on my capital while I wait for the right opportunity. I like a few names, but I’m not in love with anything right now. I’m hoping that market sentiment turns a little south so that I can get my capital working for me.

      Best regards.

  15. Anonymous says

    Have you thought about acquiring stocks from Europe? There are great companies paying steady 5-8% dividends annually. Of course there might be some tax issues etc. but any road, that would give a nice boost to your dividend flow.

    • says

      Anonymous,

      Well, keep in mind that I’m a dividend growth investor. A 5-8% yield doesn’t mean much to me if the dividend isn’t growing or isn’t completely safe.

      That being said, I’m already invested in Vodafone Group Plc (VOD) and am interested in a few other European companies like Nestle SA (NSRGY).

      I’m also invested in a couple Canadian banks.

      If you know of a very high quality European company that’s cheap, and pays a well-funded and growing dividend I’m certainly all ears!

      Take care.

  16. Anonymous says

    DM,

    I think what we have is an valuation issue. While I would love stocks to be below the average PE ratio, stocks will be above the average half the time by definition. Valuations should be based on the alternatives at any point in time. The primary alternative is corporate bonds. While many stocks are overvalued on this basis, I am still finding stocks that compare favorably to the corporate bond yield considering dividend growth.

    Ken

    • says

      Ken,

      Stocks compare very favorably to bonds right now. There is no doubt about that. I’d go a step further and say stocks compare very favorably to almost every other asset class out there (other than perhaps real estate, depending on the market).

      The only issue is that the other asset classes are currently so unattractive, that it makes stocks as an aggregate artificially more attractive than they really are on a historical valuation basis. I certainly see some companies that are more attractive than others, and I continue to like stocks much more than other asset classes (as I mentioned in the post), but that doesn’t mean that I’m completely enamored with the idea of buying more stocks at current prices.

      Again, limited choices.

      Best wishes!

    • says

      Anonymous,

      I agree with you. As an aggregate, stocks are pricey right now. And that would be using most market valuation tools like the Shiller P/E and the like.

      I would also agree that certainly some companies appear more attractive than the aggregate, namely some big companies in the energy sector, but I also would not say that anything is particularly cheap right now either. Margins of safety are hard to come by right now.

      Happy hunting!

      Best regards.

  17. Anonymous says

    Hi.

    I agree with your sentiment and many of the posters… valuations are quite high.

    I also think one of the reasons for the recent increase in prices is that money flowing into equities is just that some bond-holders are afraid of potential interest rate increases, rather than because of better business fundamentals. Hence, I wonder how sustainable the prices really are. Well, that’s just an aside.

    I would put more funds into equities if prices were not so high. Although I am itchy to increase my portfolio, I need to remember having cash is also a good thing: I am ready when there is a decline in prices. Here’s a quote from Investopedia that explains why it is good to always have some cash around:

    “Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that “The time to buy is when there’s blood in the streets.” “

    • says

      Anonymous,

      Great quote there! Right along the lines of Buffett’s famous quote about being greedy when others are fearful. Right now I’m being a bit fearful while others are greedy. Certainly I could pick up some shares in some high quality companies that aren’t priced into the stratosphere, but I wonder if I’m not reaching?

      I’m okay with holding a little cash right now. I’ll build up the war chest because, quite honestly, I rarely have much more than a few grand sitting around. I’ll be ready if we get a dip.

      Good luck!

      Best regards.

  18. says

    I agree that 14.55% is really a crazy number. I think we are heading towards another bubble. If even conservative people who normally invest into bonds only and never ever invested in stock market are suddenly heading into the stock market then this will not end well.

    I am not afraid of it and actually I am now entrenching my positions by piling cash to sustain potential collapse and I am looking forward to it as great opportunity when these same people start running in panic away from the stocks to buy more shares.

    I wonder how FED wants to handle this inevitable problem which will come when they stop QE program. Buffet is expecting it but he is claiming it will be a blip only, so hopefully he is right.

    • says

      Martin,

      I’m also looking forward to a potential market correction of 10% or more. I’m definitely interested in adding to some current positions or initiating new positions at discounted prices. This is much more important than seeing inflated prices on current prices leading to large unrealized capital gains that really do nothing for my long-term goals. Passive income via increasing dividends is the name of the game, and cheaper shares buys more dividends for the same amount of money.

      I’m not sure what’s going to happen when open faucet of easy money (QE) ends. It’s unprecedented, and so the FED has nothing historical to base decisions on how to end it on. I have a feeling that the market will be shocked, but to what degree is anyone’s guess. I’ll simply continue to do what I do best: focus on equity ownership stakes in high quality companies, reinvest my dividends and buy stakes as cheap as I possibly can.

      Best wishes!

  19. Anonymous says

    Great blog. Keep up the good work. Question for you. Times like these where you are piling up cash do you just keep it in a savings account or do you have an income fund like DNP or something better?
    -Jerry

    • says

      Jerry,

      Well, by “piling up cash” we’re talking a few thousand dollars. Nothing spectacular, as my income is relatively modest and it takes me an entire month to come up with that kind of capital. I’m currently keeping it in a bank account because I don’t plan on holding it for more than a month or two. If I were to continue building up capital and we are then talking about $5,000 or more then I would sweep it into a MMA or something else.

      Hope that helps!

      Take care.

  20. gibor says

    yes, market is expensive, but still it’s possible to find solid dividend stock at reasonable price….. 1 month ago I also was thinking that market is very expensive , but in this months solid dividend stocks like LMT and APD gained 11%, GD and RTN – 16%… I bought than LMT and APD, (limit buy on RTN didn’t get executed) and now I’m sorry that invested very small amounts in those stocks….

Join The Discussion!