Session 37—Selling, Cash Positions and Comfort.

Kortsessions lately has sounded like the work of an unrepentant bull, a total Pollyanna.  I didn’t really mean the blog to be that way: but we have been having a tough time finding bullish material to poke holes in.  On the other hand we have been inundated with a fairly constant negative opinion / misinformation flow from the financial, general and political media.  We want to be balanced, counterpoints are hard to find on the bull side of the equation.  Perhaps, too, it is due to a long-term bias that I carry toward owning assets, common stocks in particular.  You might check out Session 7, ”My Biases…”

Having stated the above, I do realize that the market is a two-way street.  People do question me about selling…just this weekend….”The market has been great.  Should I be getting out now?”  The person asking was absolutely correct.  The S&P 500 is up more than 100% since March of 2009, 17% last year and about 17% year-to-date.  So, I thought it appropriate share a little of my thought process on risk management.  I recognize that each of you have different circumstances, financial needs and risk tolerances.  In the final analysis it is about COMFORT, your comfort. The thought process that I offer here is a starting point on how you might view stock investing in the context of your entire financial picture.  To that end I will pose a few questions.

1)  What is the worst thing that can happen?

In my mind the answer to this is simple, a financial panic circa 1929 or 2008.  The Dow Jones Industrial average closed the month of August 1929 at approximately 380.  By the end of June of 1932 it closed at 42, down almost 90%.  There were no bailouts (no FDIC).  There was no stimulus and there was no QE.  It was a libertarian dream come true.  October 8, 2006 the S & P 500 closed at approximately 1560.  By March 3, 2009 it hit a closing low of 683 (-56%).  Though none of the major players in 2008 were around to experience “The Crash of ’29,” they must have read their history books, as we did not go to 156 on the S&P and unemployment did not go to 25%.  So there you have it, in a nutshell, the two worst financial collapses in United States History….both financial panics.  A large part of the banking system collapsed in one and in the other it was allowed an orderly reboot.

One last point on financial panics, they are very much like earthquakes.  You know, pressure builds up on a fault line over many years. Like financial panics nobody sees the pressure building, but when those plates finally slip the results can be devastating.  It is safe to assume that the pressure is beginning to build for the next financial panic, but because of increased vigilance, maybe new regulation, and a ‘once burned/twice shy ‘ attitude on the part of barrowers and lenders the final quake may be many years away.  This does not mean we won’t experience level 4 and 5 shocks on the market’s Richter scale, but the next killer quake may be a long way in the future.

Finally, in the ‘worst thing that can happen category’, there is always that unforeseen bolt from the blue, the exogenous event like we experienced September 11, 2001 or Pearl Harbor.  They are tragic and their economic impact, though sharp in the short run, may be very limited.  Of course, we probably will continue to see disquieting headlines from both Europe and Asia. We seem to be resilient and survive, ergo you can always expect the unexpected. Importantly, all of the above “Worst Things” have created wonderful investment opportunities.

2)   What can you afford to lose or be without during a major market setback…say down 50%?

This is personal and maybe how you reacted and lived thru 2008 / 2009 might give you a hint as how to answer the question.  The point being, if you feel that 25% is the number, maybe 50% of your sock and bond assets should be in stocks. Remember, too, that you only lose if you sell at the bottom. A resolve to see the program through uncertain times has proven quite rewarding.

Obviously, the younger you are the more risk you should be taking.  Always it is all about your comfort zone.

3)  If you are out of the market now, should you buy now?

As, I am not able to see the future or when the next big drop will occur to let someone in, my answer is yes.  You should gradually feed money into the market (dollar cost average).  Go back and take a look at Session 7”My biases…” to see why I believe owning equities makes sense as a long-term proposition.

 What about Selling?

 What about now? We have had a huge run in the market off the bottom.  Would it make sense to raise cash at this juncture? Although I am a long-term investor, I do move my cash position around my invested position.  As the market rises, I will pare back positions, sell mistakes and add to cash.  I will recommit into correction or if an especially interesting opportunity presents itself.  If the market really gets frothy, my cash position will grow even larger, but I am never all out.  Why, because I cannot see the future.  My crystal ball may be wrong.  More importantly, I own fractional shares of real businesses that may outperform a weak economy…businesses I like. The thought of me, as a sole proprietor, making a decision to sell my business because I thought an economic slowdown was coming is ridiculous.

To bottom line this exercise, you need to pick an invested position that is COMFORTABLE for you after a careful assessment of your ability and tolerance for risk.  SELLING is not heresy, especially after the run up we’ve seen and, again, it should be done is a way to provide a comfortable investment position.

What do you think?

The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities.  I may,  from time to time, mention certain securities for illustrative purpose, names where I personally hold positions.  These are not meant to be construed as recommendations to BUY or SELL.  All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.