There seems to be so much on my mind today with so many things I'd like to talk about, but I will do my best to consolidate and have one clear message in this week's edition.
Right now, we are roughly 3% off of the Dow Jones' all-time high, with the S&P 500 roughly down the same amount from its respective all-time high. The last week of trading is where we have seen a large portion of that decline, and many are wondering if this is it, or if an upwards reversal is around the corner.
Honestly, any number of reasons could be the catalyst for a severe market downturn, one of which could be a European downturn that triggers an American recession, and thus a stock market crash. I recently heard someone say, "We can thank the Greeks for inventing democracy a few thousand years ago... and now giving us a first-hand example of what happens when you implement decades of fiscal irresponsibility." I believe Greece and the rest of Europe could be the trigger for the U.S. recession, but that isn't to say it won't come from the sheer fact that the U.S. economy is due for a pullback. As we've been discussing, even the slightest movement upwards in our interest rates could have detrimental impacts on the short-term, mid-term, and long-term focus within the economy.
I refuse to be disillusioned by the fake statistics and rosy picture the government attempts to paint for us. However, understanding the dangers that are out there, I must say that I approach the markets with more of a balance. I feel confident about the way I invest my money because I do understand the bigger picture, yet take a moderate approach when actively investing my money.
I have to be honest with you, I do have a lot of faith in companies/stocks. Many people seem to equate stock risk with country risk, which I feel is completely false. It's the U.S. dollar I have an issue with. I don't like the idea of tying up my money in low-interest-bearing bonds, only to realize I've lost money to inflation. But I don't have an issue holding a company like Coca-Cola Co., because I know that as the dollar falls, they will just raise their prices accordingly. Coca-Cola isn't backed by the U.S. dollar – it's backed by a business that people around the world demand, and it will thrive regardless.
Having said that, lets discuss stocks...
As Warren Buffett once said,
“When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying – except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”
There are many pundits out there who say that buying the dips is a faulty strategy. The majority of these people like to buy and sell in the short- to mid-term, with short-term being a timeframe that is less than 2 years and mid-term being 2-5 years. And allow me to be clear: there is nothing wrong with being a trader and capitalizing on short-term trends and market movements, but that is different than purchasing an investment and then allowing it to grow and compound without jumping in and out of it.
The reality is that it's hard to give something that is designed to be an instrument of long-term growth and invest your money in it with a short-term mentality. Many of these pundits that have an issue with buying stocks on the dips are weary because there is a chance the stock/market is entering a bearish time period and the short-term might not be very profitable. While I do agree with this, I must say that I know that I might not be getting in at the absolute bottom, but what I've found when buying on the dips is that I can consistently buy close to the bottom, and that has been extremely profitable for me over my lifetime of investing.
The question is how much money should you have in stocks and how much cash should you be putting holding on the sidelines? Fortunately, Aristotle gave us the answer 2,300 years ago when he counseled moderation in everything. In this environment, only investors with tons of real-world experience, a cast-iron stomach, and ice in their veins should be fully invested in stocks. Having said that, everyone's financial situation is different, and you will know best what you feel comfortable putting off to the side for opportunistic investing. Especially at current valuations, I wouldn't even be opposed to holding cash instead, keeping what would be my cash savings in predominantly precious metals, and then converting that money at a later time when an opportunity presents itself.
Personally, I always try to keep both cash and precious metals on the sidelines and leave it there for an opportunity to clearly present itself so I can effectively act on it. Having purchasing power on the sidelines has worked out well for me because it has allowed me to act on the most recent sector crash. 2014-2015 has been the collapse in the oil markets, and many great companies that are based in this sector are trading at substantial discounts at the moment.
***Right now, one of the best companies in the oil market you can buy is Chevron Corp. (CVX), for approximately $96. With a P/E ratio of 10 and a dividend that is sitting at right about 4.5%, this is a deal if I have ever seen a deal before.***
I expect the broader U.S. market to have a sell-off of similar fashion in the upcoming future. When that time comes, I'll want to have money on the sidelines to aggressively accumulate. In the meantime, since we don't know exactly when things will retrace or how high the market will go before it does, I do plan on holding onto my positions, maintaining my exposure to the markets and building my cash reserves for the time to double down on the inevitable crash awaiting our stock market.