Why I want to be out of the market and in cash….

Wednesday 31st May 2017

Why I want to be out of the market and in cash….

I wouldn’t want to be stepping into the stock market today.

Of course, you can’t generalize. That would be a mistake. Individual stocks can go up or go down regardless of what the rest of the market is doing….

But taken in the round, my view is that the largest proportion of profits to be made in British and American stocks, during the current cycle, have already been banked.

Since 2009 stock markets on both sides of the Atlantic have been on a ceaseless upwards trajectory. This morning the FTSE 100, the FTSE 250, the Dow Industrial Average, the S&P 500 and the NASDAQ all sit at or close-to all-time-highs.

There may be a little more climbing to be done yet. But nothing like the scale of the ascent since 2009. It is late in the day to be joining an expedition into the stock markets.

And those investors sitting on the pinnacle and waiting for more remind me of those climbers who spend too long at the summit of a large and dangerous mountain.

Stupefied by the elevation and the outlook, they sit for too long. They don’t notice the light fading or the storm clouds gathering. By the time they do, it is too late. They can’t get down safely. Many are found years later – frozen into the mountainside.

  • There will be bargains….

I am no investment analyist or financial advisor. But right now, I want to be out of stocks and holding cash.

Last time the markets corrected and took a steep dive back in 2008, it was the investors holding cash who were best-equipped to act quickly, snap-up bargains for pennies on the pound and position themselves to make big profits when the market started rising again.

Those investors were in at the bottom of the climb we’ve seen since 2009. The value of FTSE 100 stocks has more than doubled over that period. FTSE 250 stocks have more than tripled. Those investors made the right move. They made the right basic play. Buy cheap, sit-tight, hold and sell when prices rise….

Past performance is no guarantee of future results. What happened last time is not a certain indicator of what will happen next time. But when the next big correction arrives – and it will – stocks have a long way to fall. It will be a golden opportunity for bargain-hunters holding cash to make hay.

The next correction is going to be traumatic for those with money in the markets. They’re going to take a massive hit. There’s going to be a window of opportunity when the larger market and the mainstream media commentators don’t want to touch stocks with a bargepole.

This is more good news for contrarian players who are prepared to go against-the-grain. The market will be so much further depleted as a result. The bargains on offer will be so much more attractive. And the future gains, so much more valuable.

  • Buying the market rather than individual stocks….

This begs an obvious question and one not so easy to answer: which specific stocks to buy?

I’m going to be straightforward and do something you won’t see many pundits do in the press or the mainstream media. I’m going to be honest and tell you that I don’t know. Not for sure.

To get the answer to that question would require a tremendous amount of work and analysis – delving deep into the fundamentals, the balance sheets and the nitty-gritty of hundreds of individual businesses.

Don’t get me wrong. That is the right way to go about finding stock-market winners. If you’re buying individual stocks then you must do the spadework. There’s no way around it. Anything less means you’re guessing or going off half-cocked.

But for the purposes of my scenario, I don’t need to identify individual stocks. In the event of a big correction, I’m interested in getting in when the market is cheap and then hanging onto the coat-tails of the gains the overall market will make as and when it begins to rise again.

For that, rather than seek out individual stocks, I might do better simply investing my cash into an Exchange Traded Fund.

  • Low cost exposure to a rising market….

An Exchange Traded Fund (ETF) is an investment fund that is traded on a stock exchange – in much the same way as you would trade normal shares. You can buy or sell at any time when markets are open. ETFs are a more liquid option than a normal tracker fund, for example, that would be priced only once a day.

Unlike investment trusts, which are also traded on stock exchanges, ETFs are generally ‘passive’ investments – as opposed to ‘active’.

What this means in practice is that you don’t have some yahoo fund manager in a pin-striped suit and braces selecting the stocks in the fund. Instead, the fund simply tracks the performance of a specific index or commodity or pre-determined bundle of stocks.

In some funds, the bundle of stock assets is selected by intelligent machines rather than human beings – all based on the investor’s individual requirements and his attitude to risk.

An upside of this approach is that management fees – which carve so much meat from the gains of managed funds – are cut to the bone.

In short, ETFs offer an investor a low-cost opportunity to get exposure to the gains of a rising market. And the perfect time to buy is when the market has crashed or suffered a big correction and the wider market is selling rather than buying.

  • Buffet is a fan….

ETFs have become a big force in the global markets. There are somewhere close to 7000 such funds holding almost £3 trillion. The buying and selling of ETFs accounts for almost 50% of all trading in US stocks.

Warren Buffett – one of the most successful investors in the world and chairman and largest shareholder of Berkshire Hathaway since 1970 – is a proponent of ETFs.

Buffett takes the view that when active fund managers charge their high fees (even when they perform badly), those managers will earn tremendous profits but the investor won’t.

Buffet believes that the best investment most people can make, whether they’re wealthy or just have a few hundred pounds to invest, is a low-cost ETF.

He’s on record telling the people who will manage his estate to invest mainly in ETFs. In his latest letter to Berkshire shareholders, he wrote:

‘My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.’

  • Not now. But certainly when….

I certainly wouldn’t be even contemplating buying an ETF this morning. No chance. I’d rather dip my feet into a furnace.

The market is sailing high above the clouds right now. The prospects for future growth are not dead. But they are certainly diminished.

Buy an ETF this morning and I’d say you’re more likely to be onboard for the market drop than you are for any significant gains.

The last good time to buy an ETF for the reasons I’m suggesting (the opportunity to get exposure to a rising market) was back in 2008 – prior to the big gains being made.

But there will be a next good time. And that will be when the market experiences a significant correction and takes a steep dive. Then, there will be bargains. Then, there is renewed prospect for long-term growth.

That time is not now. But it is coming. Until it does, I’d be in cash – waiting for the opportunity to strike. But that’s just me.

Of course, I’m no investment expert. I don’t pretend to be. And I don’t offer advice. I’m just a guy watching on with an opinion. A guy who says it as he sees it. No more. No less. And I like to share what’s on my mind….

Right now, cash is good and opportunity is coming….

That’s how it looks from here….

I’ll be back with more next Tuesday morning.

All the best,

Dave Gibson

Money Truths