Sitting on the Sidelines (The Art of Patience)

I’ve been slowly exiting out of the markets since May when I sold out of most of my individual stock holdings. Sudden stops and turns always seem abrupt, so I am not surprised in the least bit that my shifting strategy approach has caught the ire of a few other investors.

It’s never been my intent to mislead anyone, but since these blog updates are occurring in real-time, I don’t have the benefit of any future foresight (and wisdom) to help me navigate through today. For that I am sorry! But I would like to believe that I’m still evolving as an investor (and person): learning, growing, adapting, maturing, etc.

And whatever I can learn from my own experience, research, and from other smarter investors, I will be sure to share those thoughts with readers on this blog. Of course, I’m not perfect and will make a ton of mistakes in the process of getting to early FI… I hope readers will bear with me as I try and navigate my way through to the finish line.

With that said, recently I’ve been very focused on tuning in to the topic of deflation. As everyone is now well aware, commodity prices have been crashing and many foreign currencies (outside of the almighty U.S. dollar) have plummeted this year.

And although the stock market has been falling a bit these past few months, for the most part, the broader indices are still sitting near all-time highs. In other words, even though there has been a lot of price action going on, the majority of investors are still apathetic because the wave has not hit them yet; as is typical, the everyday person on the street will not care until they are impacted directly.

Not a good sign! From Zero Hedge:

20150806_comms

But a lot of people are starting to care because they can feel the carnage first-hand. A good friend of mine recently conveyed a message of utter distress to me when he texted the following, lamenting about the performance of his oil and energy holdings:

I’m gonna go get hammered tonight. CVX, XOM, and KMI are depressing me…

No, there is not yet “blood in the streets”, but things are starting to get real interesting…

What Lies Ahead?

Moving on to world news, there’s a lot of turmoil going on right now with countries such as: Greece, Puerto Rico, Venezuela, Brazil, etc. None of the on-going developments are any good… but the ONE market that scares me the most is China.

If the world’s second largest economy goes… so will everything else. And right now, China is holding on by a thread…

The Chinese stock market has started to show stress cracks, and is currently being stitched together by massive government intervention. So much for free markets… although it’s not like they exist here either, or anywhere else across the globe for that matter…

From Money Morning:

Over the last month, the Chinese government has implemented at least 40 measures to prop up the market, including:

  • An interest rate cut by China’s central bank.
  • Establishing a stabilization fund to outright buy stocks.
  • A ban on stockholders and executives from selling stakes in listed companies for six months.
  • An order for companies to buy equities.
  • An investigation by the nation’s public security bureau into short selling.
  • A halt of initial public offerings (IPOs).
  • Official speeches and commentaries to assure citizens that China’s stock market will stabilize.
  • Reduced state media coverage of China’s stock market.

China’s stock market rescue efforts are estimated to have cost more than $161 billion.

But it’s not the Chinese stock market (mostly comprised of uneducated speculators) that scares me the most… It’s their shadow banking and real estate bubble that could burst at any moment:

As an investor, I can’t help but feel great concern for what may be in store for all of us…

The Sidelines

It’s not my place to tell anyone else what to do or what to think; you have to form your own conclusions. I am not a qualified financial advisor or consultant. However, I will freely share with readers what I am doing myself… Please take the following with a grain of salt, as always.

Right now, I feel a lot of unease and the daily news is not helping matters. As a precaution, I’ve started to gradually exit out of the markets. Call it a hunch, or whatever you want, but I am very hesitant to ride things out into the fall season where historically markets tend to crash. Let’s not so soon forget about 2008 (September) and 2001 (September)…

Since exiting out of my individual stock positions in May, I’ve gone even further and have now liquidated out of: 401k, current 401k, and most of my Roth IRA. I still have some capital tied up into small investments in my Roth IRA.

Outside of my real estate holdings, I’m still holding a few individual companies in my stock portfolio. Other than that, I’m cash strong, which I feel like is one of the best places one can be in the event of a prolonged deflation.

Yes, the Fed hates deflation and will do anything possible to get us out of it… But Japan has been trying the same thing for the last 20+ years and they haven’t succeeded at all in slaying their own stagflation…

My take is that things need time to unfold. You don’t get inflation overnight… Or hyperinflation. All I know is this much — I don’t like investing when markets are eclipsing all-time highs and I have a strong sense that deflation is very real and already happening TODAY!

When the time comes to strike, I will gladly clean up the mess on the streets. My buddy is hurting badly right now because his oil and energy stocks are down over 30% from the time he bought in. And although I’m tempted to jump in right now, I remain convinced that the worst is yet to come…

But for sure I’m paying attention to the oil and energy sector right now. I have my shopping list ready and I look at prices everyday…

There will be a time to load up. If anything, I feel like shares of mining companies are even more depressed right now. If you want to talk about a hated sector, look no further than to miners! On the turnaround, it’s very likely that fortunes will be made.

But again, patience…

The Art of Patience

Most investors who I talk to attribute my success to luck — I was in the right place at the right time.

I would agree.

I’m not that smart of an investor and most of my gains could have been realized by any other Average Joe investor… So, I know my own limitations… But I also know how wonderful a gift opportunity can be if one grabs hold of it and doesn’t let go.

With that said, one thing I’ve learned over the last few years (from myself and from people watching) is this:

Investors don’t fail for lack of ambition, or motivation, or passion, or from inaction. In fact, it’s quite the opposite. Investors who fail do so because they were too ambitious, too motivated, too passionate, and far too aggressive. The investor who risks gambling it all away when there are clear warning sirens blaring in the air to be cautious is doomed to fail.

Everyone and their grandma is into Buy and Hold investing these days. It’s the popular mantra being spread across the blogosphere. To go against that philosophy would be treasonous… or so it would seem.

But there is something to be said for patience. Even the aforementioned Buy and Hold investor likes to preach value investing (which involves a degree of timing), so it’s not as though they are investing everyday regardless of rain or shine… Well, I guess some are when they invest periodically into every paycheck, but you get my point…

I like to look at things from the perspective of risk vs. reward. If my risks are high (like right now), I don’t want to invest. When the downside is minimal and the reward stupendous, I’m all in!

My skill as an investor isn’t in knowing what to buy, or when to buy… It’s figuring out when NOT to buy!

And as I’ve mentioned many times before, this market (stocks, real estate, etc.) is too frothy for my tastes.

I’ve recently discovered that I am not a true Buy and Hold investor (although I do have assets that I do indeed just Buy and Hold). I’m primarily a Market Cycles Investor. And this type of strategy not only allows for, but encourages an investor to sit on the sidelines as they await for better opportunities.

As time passes, I’ve started to conclude the following:

Buy and Hold investing definitely works and it is the preferred strategy of anyone with a medium to long time horizon. It works wonderfully across many years.

However, if you’re more impatient and aggressive (like me), Market Cycles are probably your preferred cup of tea. Although I don’t have evidence to back up this statement, I believe it to be true and I will attempt it myself:

To reach early FI, you don’t need to take many swings. Regardless if it’s a positive edge (rising bull market) or negative edge (falling bear market) in the marketplace, you only need to hit two homeruns to get to the endgame.

Catch the edge (either one) at the right time.

That’s it.

I’ve already hit one homerun… and it made me an overnight millionaire (almost… it took 4 years). I’m patiently awaiting for the next perfect pitch to uncork a second moonshot.

It may take 1 more year of waiting… Or 2, 3, 4, 5… But if you are a believer of Market Cycles, then you have full conviction that the tide will eventually turn. It always does.

When it finally does, there will be blood on the streets. Retail investors will have fled. Wonderful assets will be sitting there on the shelves for all to grab. Very few will want the merchandise. That’s when you load up the shopping cart and have yourself a field day. It will be Christmas and Black Friday all rolled up into one.

 

The Art of Patience.

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Dividend Growth Investorgeorge puckThe DudeOinketteAlexander @ CashFlowDiaries Recent comment authors
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No Nonsense Landlord
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I am still in. It may be good, or not. The last 130 years says it is good to be in.

I do think deflation is on it’s way. That will include real estate prices. China has just devalued their currency. The US, if rates rise, will have a stronger dollar. That means wages fall in the USA as more companies outsource work, and bring in Visa holders to do work.

Of course, if the minimum wage rises, maybe that stems the tide of deflation.

Jon
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Jon

Have you considered investing in Greece, Russia, Brazil or Argentina? There is certainly blood on the streets of some of these markets already!

Midwestern Landlord
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Midwestern Landlord

Regarding anyone thinking that you were lucky or any of us that have become financially independent being lucky I would say refer to the following: “Luck is when preparation meets opportunity”.

I think you are on to something regarding being cautious right now. The common argument is that no one can time the market. And this argument is true. However, go back several years in time and see what the market has done historically. There are peaks and valleys. When markets are at near time highs (with accompanied world wide warning signs) I see no issue with playing it conservative and seeking a more lucrative entry point. Ultimately everyone needs to decide for themselves.

Dividend Hustler
Guest

Do what you gotta do FIF. You’ve already got skin in the game with your rentals. Getting out of stocks is smart as you can always buy back in and buying way more shares if we have a correction. Also, having all that cash is nice for your mentality/soul. What’s the rush? No need to take huge risks when you clearly already set the foundation with your investments already. Just sit back and wait and when time comes… BAM! I get it.
I’m a consistent investor and won’t be selling anything. If my portfolio falls 20 percent, no sweat I’ll be buying more on my best positions. It’s my income which is more important.
Let’s keep hustling it up bud. Do what we gotta do. It’s all good.

The Dude
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The Dude

FI Fighter

Deflation is not happening now.

Overall deflation is very unlikely. I think I’ve mentioned this before, but it’s worth a reminder, that the U.S. has only experienced deflation twice in the last 60 years. One deflation period was recent, but it was so minor that it’s not worth considering. If we were to have prolonged deflation, which we almost certainly won’t, then you’ll have more to worry about than bottom fishing. Deflation causes liquidity traps, which render monetary policy useless. This is why Japan had a 20+ year recovery. Also, since a core element to inflation is equivalent rent, this would signal a reduction not only in your rents but also the value of your home. You’d likely be unable to sell because, even if people had jobs, nobody would be lending.

Commodity price reduction does not immediately mean deflation. Commodity prices are but one component of inflation, and in Feb, were the reason we did experience deflation. We are not, as you suggest, seeing it now.

But, why are commodity prices down? Does this automatically signal a huge reduction in demand (therefore a leading indicator to a slowdown in the economy) or are there some supply elements at play too? How about technological advancements (which by the way have been immense over the last six years)? What about geopolitics? What changes, if any are structural? One cannot just look at a commodity index graph correlated with the stock market graph and conclude that because there is a huge commodity crash, that an equity crash is right around the corner.

With regard to China, why do you say China is holding on by a thread? Are you aware they grew 7% in Q2?

I am unconvinced that China’s real estate sector is cause for much concern. Real estate starts have been in decline since 2011, and the government, unlike the U.S. government in 2006-2007, has been actively involved in discouraging speculation for years. Down payments are typically 20-40% on primary residences and 40% on secondary residences. Furthermore, they have a massive population migrating to cities, which helps with slack. The slowdown has been happening for quite some time and only recently started to pick up again.

I’m once again worried about your undisciplined approach. You’re shifting strategies frequently and appear to be basing your investment decisions on emotions and untested hypotheses and gut feel rather than facts. I would encourage you to do some reading on investor psychology/behavioral and at least be familiar with common biases. If you’re unaware, these can trample you.

Instead of trying to time the market and figure out when to catch a particular sector at the bottom, why not just work instead on your allocation and diversification? Master the basics first.

I would also stop reading Zero Hedge. It is not a serious financial publication. For that matter, stop reading any publication based on heterodox economic models. They are not helping you. Learn the mainstream models first and master the basics. Then feel free to branch out from there.

Jon
Guest
Jon

I agree re: zero hedge – it’s dreadful, and can be dangerous if people take it seriously. They have been calling for a market crash since 2010!

The Dude, do you have a blog?

The Dude
Guest
The Dude

Yes, they have been calling a market crash since 2010! Everyday some bit of news will be turned into evidence that Armageddon has most certainly arrived and the world is one step closer to total annihilation.

I don’t have a blog, but I have been considering starting one as a way to collect my thoughts and get feedback on the news I’m reading and trends I’m seeing in world economies.

Jon
Guest
Jon

Please do man! Your views are spot on and seem to align with mine.

Dividend Growth Investor
Guest

The Dude and Jon,

I would gladly read both of your blogs, if you ever write them.

Best Regards,

DGI

george puck
Guest

Be careful about that 7% number.

China is notorious for questionable economic numbers.

Many indicators suggest China is slowing, or may even decrease.

Alexander @ CashFlowDiaries
Guest

haha I love “When it finally does, there will be blood on the streets.” regarding the inevitable downturn. Hopefully when its this happens I will be a good cash position to reap the rewards. I hope it happens sooner then later!

Oinkette
Guest

Well, happily I have >10 years to go and I’m just starting my taxable account this year. Guess I should wait until September….

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