Category: Market timing

Cash Allocations Fall to 17½-Year Low

Cash Allocations Fall to 17½-Year Low. So says the Allocation Survey of the American Association of Individual Investors.

Why are individual investors holding so little cash?

Holding cash is painful. Cash returns nothing. Its purchasing power erodes due to inflation. But we are in a low-return environment, and inflation is low, so holding cash ought to be less painful now due to reasons of yield and inflation than at most times in history.

Is the search for yield driving people towards riskier assets? That may be part of what’s going on.

Are investors staying in risky assets because nothing bad is happening to them (yet)? Possibly.

Some of the pain of staying in cash may be due to relative deprivation, meaning we are surrounded by people who have made good money in risky assets such as stocks in recent years.

Quoting from the following article: “Specifically, the July 2017 reading of investor cash came in at 14.5%. This was the lowest level in the survey since January 2000. In fact, the only lower readings in the survey’s history back to 1987 occurred in January-April 1998, July 1999 and November 1999-January 2000.”

Looks like the only time people had less cash in their portfolios than now was shortly before the peak of the dot-com bubble. In retrospect, holding on to more cash and fewer tech stocks back then would very likely have worked better.

Would it be a wild conjecture to say that those with the patience to sit out this market in cash will be rewarded? Probably not, but I would also not be surprised if the holders of cash find that their patience is being tested further before the next crash relieves them.

DISCLAIMER: The information on this forum is provided without any express or implied warranty of any kind. This information does NOT constitute financial or investment advice. The information is general in nature, and is not specific to the reader. YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED ON THIS FORUM WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A PROFESSIONAL BROKER OR COMPETENT FINANCIAL ADVISOR.

Catching bottoms

I recently came across an article titled “Ten Rules For Catching A Bottom“.

Market timing is hard enough that no one can do it consistently but the rewards of success are high enough that it piques interest. Besides, the question “when should I buy?” is on the mind of every investor/trader simply because it affects outcomes.

Of the rules themselves:

  • My experience agrees with rules 3 (wait for a higher low) and 4 (wait for a longer term moving average to stabilize).
  • Rule 7 (keep your trades small) is vital, and I wrote about this in a recent post.
  • Rule 10 (step in slowly) is dangerous if one doesn’t understand how it affects rule 7. If you keep investing 1% of your portfolio repeatedly into a stock that keeps dropping and eventually goes to zero, you could lose 5-10% of your portfolio.
  • Rule 6 about using stop losses is not very useful if one follows rule 7 to keep trades small. In my experience, Rule 6 (use stop losses) can hurt outcomes. I would sell only if new information says that the stock isn’t worth holding; otherwise, I would hold. I’ll explain this with an example. Here are three stocks that were in the news last year, and the gurus who owned them:
  1. Valeant (VRX): Ackman
  2. Sun Edison (SUNE): Einhorn
  3. Horsehead (ZINC): Pabrai

Of these, VRX bottomed and then nearly doubled, but Ackman sold near the bottom. The other two (SUNE and ZINC) went to zero. If these hedge fund managers, with their extensive resources, could not predict survival, it is fair to say that most individuals cannot accurately predict outcomes either. A stop loss gives up a potentially large gain from a rebound for a small but certain avoidance of loss. If an investor wishes to avoid losses, bottom fishing isn’t the place to be to begin with, but once in the game with a tiny bet (e.g. 1%, all trades inclusive), getting out of the game with 0.2% remaining may not be a good idea.

DISCLAIMER: I own VRX stock. In the past, I have owned SUNE and ZINC stocks. The information on this forum is provided without any express or implied warranty of any kind. This information does NOT constitute financial or investment advice. The information is general in nature, and is not specific to the reader. YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED ON THIS FORUM WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A PROFESSIONAL BROKER OR COMPETENT FINANCIAL ADVISOR.