Contrarians for Cash, anyone?

A place to talk about speculative investing ideas for the optional Variable Portfolio

Moderator: Global Moderator

Post Reply
User avatar
BearBones
Executive Member
Executive Member
Posts: 689
Joined: Sat Sep 18, 2010 4:26 pm

Contrarians for Cash, anyone?

Post by BearBones » Sun Nov 21, 2010 10:01 am

Like many of you, I hold a VP in addition to the PP. For the PP, I am committed to holding my nose and my breath and investing without regard to market sentiment or market timing. For the VP, I am more speculative and contrarian.

I tend to think we are in a unique period in which many assets are overpriced and, therefore, at particular risk of large decline. A tremendous amount of easy money was generated during the past 2 decades, followed by 2 market crashes that caused investors to shift from relatively large allocations in equities (probably appropriately so), a concomitant housing bubble, a subsequent bond “bubble,”? and now tremendous appreciation of gold and other commodity prices. Currently, stocks do not seem particularly inexpensive, bond yields are at historically low levels, and gold is priced far over its historic average.

From a contrarian perspective, it seems the only asset class that is truly unpopular right now is cash. Fears of inflation combined with near-zero rates of return make me very uncomfortable with cash. For these reasons, I am electing to increase the % of cash in my VP, offset by an increased % of gold/silver in the event of inflation.

Admittedly, I am a relatively naive and unexperienced investor (“a kid, sitting at the adult table,”? as Coffee put it). Does this seem risky or foolish to anyone?
BobS

Re: Contrarians for Cash, anyone?

Post by BobS » Sun Nov 21, 2010 11:23 am

Not at all.  I went to all cash in July of 2008, then in June of 2009, went 80% precious metals, which I sold all of except the gold, a few weeks
ago.  A friend of mine who's been doing financials has sold off most of his stocks recently.  I'm guessing that may be a bit premature as I,
personally, believe stocks will be fine until January or February.  But I wouldn't trust me.
User avatar
MediumTex
Administrator
Administrator
Posts: 9078
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: Contrarians for Cash, anyone?

Post by MediumTex » Sun Nov 21, 2010 12:02 pm

BearBones wrote: I tend to think we are in a unique period in which many assets are overpriced and, therefore, at particular risk of large decline. A tremendous amount of easy money was generated during the past 2 decades, followed by 2 market crashes that caused investors to shift from relatively large allocations in equities (probably appropriately so), a concomitant housing bubble, a subsequent bond “bubble,”? and now tremendous appreciation of gold and other commodity prices. Currently, stocks do not seem particularly inexpensive, bond yields are at historically low levels, and gold is priced far over its historic average.

From a contrarian perspective, it seems the only asset class that is truly unpopular right now is cash. Fears of inflation combined with near-zero rates of return make me very uncomfortable with cash. For these reasons, I am electing to increase the % of cash in my VP, offset by an increased % of gold/silver in the event of inflation.

Admittedly, I am a relatively naive and unexperienced investor (“a kid, sitting at the adult table,”? as Coffee put it). Does this seem risky or foolish to anyone?
Here is another way of looking at it.

If you decide to hold cash in your VP, you are basically saying that you are comfortable holding an asset that is not going to appreciate and that is not going to generate any income either with interest rates where they are right now.

I understand that you would be presumably holding cash with the intention of buying risk assets in the future at lower prices than today.  But now we are talking about two VP market timing decisions--first, the decision to increase the cash allocation now and, second, the future decision to move back into risk assets at some point in the future.  You would need to get both of these calls more or less right for this to be a profitable approach.

What I see a lot of people do is move to cash at the right time, but then get back in the market at the wrong time, or vice versa.  Being able to make both decisions correctly is tough, especially for an inexperienced investor.

Since what you are proposing is an approach that will in the short run provide you a guaranteed zero return (i.e., increasing the VP cash allocation) and the PP has historically provided a 9%-plus return, I would be inclined to just increase my PP holdings and not worry about it.

Bear in mind that stocks are currently cheaper than they have been for much of the last 10 years and bonds are WAY below the levels they reached in late 2008.  Gold looks expensive at $1,370, but it looked expensive at $800 as well.  There is no secret insight that could tell any of us where these assets should be today and where they will be in the future. 

The markets will never be anything other than the reflection of group sentiment at a given point in time.  Considering that the human brain is capable of calm reflective rational thought as well as astonishing stupidity (with no rhyme or reason as to what triggers either state), I would say that trying to anticipate which aspect of our nature will manifest itself in the markets next will always be impossible.  Part of what is so exhausting about trying to guess what people will do next is that deep down I think we all know that this activity is similar to a dog chasing his tail.

In "Extraordinary Popular Delusions and the Madness of Crowds", Charles Mackay notes that in observing several centuries of bizarre collective behavior, one sees three core longings in the human spirit that set the stage for delusional group behavior.  These longings are: (1) the desire to avoid death, (2) the desire to avoid work, and (3) the desire to know what the future holds.  Any time someone asks you to believe that he has found an answer to one of these three longings, I suggest great caution.
Only strength can cooperate. Weakness can only beg.
-Dwight Eisenhower
User avatar
craigr
Administrator
Administrator
Posts: 2544
Joined: Sun Apr 25, 2010 9:26 pm

Re: Contrarians for Cash, anyone?

Post by craigr » Sun Nov 21, 2010 8:00 pm

I can't add much to Tex's post. He's right about market timing needing two correct calls on getting out and getting back in. People often forget that. Mechanical rebalancing takes the emotion out of these decisions.

Frankly, I feel much more comfortable owning all the assets than concentrating my bets. Every asset has risks (including cash).
User avatar
BearBones
Executive Member
Executive Member
Posts: 689
Joined: Sat Sep 18, 2010 4:26 pm

Re: Contrarians for Cash, anyone?

Post by BearBones » Sun Nov 21, 2010 9:12 pm

Thanks for both of your wise (and consistent) comments. I will admit and clarify that I am already largely in cash (about 70%, largely out of paralysis rather than reason) rather than intending to market time out of other asset classes into cash. I am taking the first step out of such a paralytic state by implementing the PP in two more weeks. Yikes.

I know that this has been discussed before, but I am another one of those folks having trouble jumping into the PP with all of my assets all at once, moving my life savings from cash into 3 other positions, particularly when cash seems to be the only unpopular asset class out there anymore. The nagging, contrarian side of me is telling me that I am going to lose more than I am going to gain by moving simultaneously into expensive gold, equities, and LT bonds. I was planning to shift to a 25% cash position over 2 years, sooner if there is a large market correction of any sort. But I think that I am hearing vague voices or reason saying, "Just do it, BearBones. DO IT!"
User avatar
craigr
Administrator
Administrator
Posts: 2544
Joined: Sun Apr 25, 2010 9:26 pm

Re: Contrarians for Cash, anyone?

Post by craigr » Sun Nov 21, 2010 9:20 pm

Harry Browne's last golden rule of financial safety is to always err on the side of safety. If you are nervous about doing any investment decision then by all means don't do it. Stay in cash for a while until you feel comfortable and move in slowly or only do a smaller part of your portfolio to the strategy and keep the bulk in cash. No reason to cause more stress with something you feel uncomfortable with. But I would advise no matter what approach you ultimately do to not time the market.
User avatar
MediumTex
Administrator
Administrator
Posts: 9078
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: Contrarians for Cash, anyone?

Post by MediumTex » Sun Nov 21, 2010 11:29 pm

I think that there are two kinds of PP implementation discomfort: (1) discomfort at doing something that seems so counterintuitive, and (2) discomfort because of a lack of understanding of the overall strategy, including how and why it works.

Echoing craig's comment above, if you are uncomfortable with implementing the PP because of factor (1), then I would say perhaps ease into it slowly and let your commitment to it grow as your confidence in it grows.  If your discomfort is because of factor (2), then I would say don't do anything until you have fully satisfied yourself that the PP meets your own investment goals and matches up with your risk tolerance.

When standing on the other side looking at the PP, it can be pretty daunting.  People you trust in other areas of life are often no help at all, because they will normally look at the PP and say it looks crazy and then provide a little commentary on each PP asset ("gold is going higher", "bonds are a terrible bet", "stocks are where to be long term", etc.).  When it comes to professional assistance, there are few investment advisors selling the PP strategy, in part because the implicit assumption built into the PP is that most investment advisors are charlatans (even though some of them don't even know it).

I hope that you will get to a comfort level that will allow you to proceed with the PP strategy in a rational and disciplined manner (it's harder than it sounds).  I think that for most people, adopting the PP strategy is a decision they are very unlikely to regret.  I fully understand, however, how hard it can be to take such a bold step in an unconventional direction--that's the main reason that so few people ever actually implement a PP of their own.

For me, the peace of mind that the PP provides is hard to beat and something that I enjoy very much.

Do what makes sense to you, though.  That was one of the key themes that ran through much of HB's thinking.
Only strength can cooperate. Weakness can only beg.
-Dwight Eisenhower
Post Reply