I was asked by SA to provide my best single stock or ETF idea
for their "Just One Stock" series. I submitted the suggested
"interview" below, hewing to their questions in previous articles
in that series. They decided it wasn't quite what they were
looking for, since that series is for "stock recommendations." I
don't blame them for passing on my article -- I didn't discuss a
stock! But at
market, I honestly believe what follows is the safest, most
common sensical "Just One Anything" I could suggest. See if you
1) If you could only hold one stock position in your portfolio
(long or short), what would it be?
Safety First, Inc (symbol: C-A-S-H.) Okay, before anyone runs to
their Bloomberg to buy such a company, the only "Safety First" you
will find there is a privately-held Canadian mortgage company.
That's not the one I'm referring to. And if you look up the symbol
CASH, you'll find it has been cornered by over-the-counter
financial services firm Meta Financial.
While either of them may be worthy of consideration, when I say
cash, I mean CASH, as in "dollars," "moolah," "dough," "clams,"
"smackers," "filthy lucre" or "cold, hard cash." This isn't a
stock, but it is the asset class that provides the only truly safe
haven when you want to step back from "Just One Stock" or the whole
lot of them!
2) Tell us more about the company behind the stock.
The company behind this "stock" is the US government, an entity
that is bankrupt of fiscal responsibility and common sense.
company is backed by / guaranteed by more than 300 million
Americans. While we may take occasional leave of our senses, as we
seem to do on more Tuesdays in November than at any other time, we
are among the world's hardest-working, smartest-working citizens
who, when government doesn't stifle us, bring to the fore more
entrepreneurs, inventors, innovators, and patent-holders than the
citizens of any other nation on earth.
3) How does your choice reflect your (or your fund's) investment
approach? Tell us more about your approach and goals.
Unlike those who trumpet "buy and hold", we believe there is a
time to "buy and hold." We call those times "secular bull markets."
But unlike the contingent that sees buy and hold as the only
strategy for all seasons, we also recognize that secular
markets can, and often do, destroy all the gains you realized
during the appropriate season to buy and hold.
We've seen the proof of that pudding in our Growth and Value
Portfolio, which we instituted January 1, 1999. In those 11 years
it is up 234.5% because we are willing to reallocate assets to
equities when the market is depressed and the timing is propitious
to do so - and to go to cash or other asset classes when the market
is overpriced and looks ready for a fall. A buy and hold strategy
in the S&P 500 during that same time frame would have
11.4%. And that is before inflation, commissions, or index fund
In the "long term" I have no doubt the markets will come back
and scale new heights. I believe this because I believe, no matter
where the political and economic pendulum swing, the immovable rock
remains: the rock of American innovation and entrepreneurialism.
But as John Maynard Keynes observed when someone claimed that while
their stock was down then, in the long run it would recover, "Yes,
but, in the long run we are all dead."
The alternative, for us, is to buy and hold in secular bull
markets and to be willing to be nimble in reallocating assets
during secular bear markets. Ah, but how to know when to do so?
4) Can you talk about the industry/sector? How much is your
selection based on the company's industry, as opposed to a pure
As our firm's Chief Investment Officer, I make my decisions
about investing at the macro level. That transcends both company
and industry. It's even bigger than sector. The first decision we
make is "asset class." Then, if the indicators line up, we'll move
down into sector, industry, and company.
Of course there will be bottom-up special situations that defy
the market, and we own a select few of them right now. But
basically I don't try to hold back the ocean with a popsicle stick.
When the "sector of all sectors" - the market itself - is
overbought or oversold, we like to be on its good side. Do we
always succeed? Of course not. But in this business if you can get
the basics right 7 out of 10 times and invest accordingly, you will
be way ahead of the market.
To make the asset class decision, I look to history and to 3
primary macro indicators. Historically, I find an eerie similarity
between secular bulls and bears past, and the present (and likely
future) secular bears and bulls. Regular SA readers
saw this chart a few articles ago
. I take no credit for it. It comes to us courtesy of Sy Harding,
one of the smartest technicians I know and I've known a few hundred
in my career.
(Sy Harding's Street Smart Report 386-943-4081. Sy writes a
free daily blog at
What this long history says to me is that, for over 110 years,
the market has behaved in relatively predictable patterns.
Beginning with a secular bear market in the early 1900s, there were
then 3 secular bull markets and 2 secular bear markets. I believe
that we are now in the secular
bear market that has followed the rip-roaring, magnificent bull
market from 1982 to 2001.
bear began with the dot.com.bom in 2001. It took the Dow from
11,300 to 7,500 in just one year. Then, beginning in 2003, the
market mounted a fine rally, mostly thanks to cheap government
financing that inflated home prices at the same time it kept rates
low enough to suck in millions via cheap, if unsustainable,
mortgages. The ensuing rally soared way up to 14,000 and change in
2007, before plunging back to 6626, then the market in March 2009
rally, where we stand today.
Historically, secular bull markets last somewhere between 16 and
. Bears are slightly less, but are still measured in years, not
months. Secular bulls are great times to "buy and hold!" But
secular bear markets are characterized by a time of "digestion."
They ratchet up, they ratchet down, they go nowhere and do nothing
other than destroy the confidence of most investors and cause them
to flee to other asset classes at precisely the wrong time.
Juxtaposed against this historical precedent, I then look
primarily at three macro trends: the total value of all publicly
traded stocks on US exchanges and OTC (which would include a number
of foreign firms) divided by total US GDP; the ratio of any stock
index to its average inflation-adjusted earnings over the past
decade (a ten-year PE ratio); and total equity market
capitalization divided by book value adjusted for inflation. When
these approach historic lows - Stocks/GDP at 0.7 or less; 10-year
PEs at 10 or less;, and total stock cap to book of 0.6 or so; I
begin to buy. When they are too high, like Stocks/GDP at 1.5 or
more; 10-year PEs at 25 or more; and total stock cap to book of 1.2
or so, I begin to sell.
Using history, these guidelines, and a healthy dollop of
experiential Kentucky windage allows us to fine-tune and add or
subtract incrementally to our cash or our equity positions as we
5) Describe the company's competitive environment. How is this
company positioned with regard to competitors?
Cash has no competitors. None.
Among the "cash equivalent" or "market alternative" investments
often offered up by those who need you to "keep your cash working"
for their own livelihood (new tires for the Ferrari, a remodel of
the kitchen on the house in the Hamptons, private school in
Switzerland for the kids, etc.) are: bonds, precious metals,
dividend aristocrats, and utilities and other high-dividend stocks.
None work with any consistency.
Some believe bonds move inversely to stocks.
They have from time to time, but in times like these, when rates
are so low their next likely move is up (meaning the price of the
bonds themselves will decline) it just doesn't make sense. Treasury
bonds, which set the tone for the bond market, are priced at some
of the lowest levels they've seen in history. We can not print
money 24/7 and still attract capital from around the world at
historically low rates.
Well, then, why not buy gold and other precious metals? You may,
and we have, but not as an alternative to stocks. Gold marches to
the beat of its own drummer. If you believe gold will rise because
there will be more crises, more martial, political or financial
"blood in the streets," or a major move up in US interest rates,
then gold might move inversely to equities. But crisis and
inflation are the two typical drivers of gold prices. If we see no
major world crises and experience deflation or stagflation, gold
writ large will not provide you with an alternative. It may provide
you with outsize profits, but it won't be solely because it moves
counter to equities. It doesn't.
How about if we stick with the best quality companies we can
find in defensive industries that also pay big dividends? They will
most often plunge with the rest of the market. Their AA credit
rating means nothing when investors panic. "Sell everything!" means
high yields of 7% become 9% as prices decline, then 11%, then
higher -- but there are no takers. If one
decline can remove 11% of your principal, how attractive is an 11%
To say, "I'm not worried. [[GE]] will always come back," is fine
when you're 20 years old. But at 65, watching it go from 40 to 6,
it was scant comfort to know that it is still a going concern.
6) If you don't like any of these alternatives, where do you go
for safety? You aren't really talking about stashing dollars under
the mattress, are you?
No - but I'm talking about the intelligent corollary to doing
so. Ultra-short-term Treasuries are a safe haven. Pre-refunded
municipal bonds (and bond funds) are a safe haven, since they
already have the cash in the till to be redeemed. And money market
funds now carry more insurance and tighter regulation than ever
before, so they are valid places to stash cash. None of these will
yield much more than enough to keep you even with inflation, but in
the next cyclical bear downstroke, would you rather have what you
started with and be able to buy what you want at 50 cents on the
dollar - or be the one whose portfolio fell from a dollar to 50
I also like floating-rate bonds and bond funds, as well as
Treasury Inflation Protected Securities, which both rise if
interest rates are rising. If rates don't rise, they will lose
principal but will pay a yield that may well be greater than any
And there are always "special situations." These are stocks
that, like gold, move based upon their own internal dynamics --
dynamics which are strong enough to overcome whatever the market is
doing. A junior gold producer that is showing incredibly strong
delineations of the rich veins their properties have already
demonstrated could leapfrog into being a major producer and see
huge returns. I'm reviewing one such firm for our clients right
now; if it meets our criteria I'll write an SA article about it in
the next week or two.
Another special situation might be the commodity ETFs, whether
they hold companies that produce sugar or grains or coal or natural
gas. Again, I'm looking at one here that has been completely beaten
down in the midst of the great cyclical bull rally of 2009 and
early 2010. If it pans out as well, I promise to write it up for SA
7) How does the stock's valuation compare to its
They are apples and oranges. No matter whether you go long or
short, you can lose real money. Investments in cash may place you
on the sidelines when you might have done better in the market, but
that only means the loss of a short-term opportunity. I'd rather be
on the sidelines during times of turmoil than rolling the dice,
hoping to get whole.
8) Describe current sentiment on the stock. Does your view differ
from the consensus?
Absolutely. Although there is no consensus. I exchange
newsletters with a number of my fellow editors and I read
voraciously. Right now, I'd say half the people out there worth
listening to believe this pullback is a natural occurrence in a
brand-new bull market and has just about run its course so it's a
great buying opportunity. The other half say the rally was the
aberration and there is simply no sentiment, no reason, and no
spirit to take the market higher - that all the "last 30 minutes of
trading" rallies are merely Wall Street program traders trying to
middle each other out of a ha'penny a share.
My move to 50% cash says, "I don't have a clue which way this
thing is going to jump. And I'm not embarrassed to say that because
it is the only honest thing to say." Holding cash will
be outside the mainstream consensus because the mainstream
consensus is formed by the talking heads on CNBC, the Internet and
your SPAM folder who want to sell you something. If you sit with
good old safe and secure cash, you aren't buying what they're
9) Does the company's management play a role in your selection?
If so, how?
Absolutely. If I had greater faith in my government's competence
in balancing the budget, spending only current receipts, and paying
down debt, I'd be willing to commit more to the stock market. In
fact, the greatest percentage of our cash equivalent holdings are
in floating-rate bonds, floating-rate bond funds, and TIPS and TIPS
ETFs. I believe my government - the "company's" management - is
hell-bent on decreasing the value of US dollars in order to repay
its creditors in ever-less-valuable paper. So I am unwilling to
hold even cash-equivalents without some hedge against inflation -
and that hedge is well-provided by instruments that rise in value
as interest rates rise and the price of the underlying bonds
10) What catalysts, near-term or long-term, could move the stock
move significantly - and therein lies the relaxing certainty of
this investment. This is the anchor. Using that analogy, when it is
time to move your boat forward, an anchor will slow you down. But
in times of turbulence, the intelligent sailor - or investor - will
seek shelter from the storm and, if they have any experience with
such things, will anchor firmly both fore and aft.
We aren't looking for a catalyst to move our cash. We are
looking for a catalyst that will move the market and thus give us a
reason to put our cash back at some risk. If I were to hazard a
guess, I'd say we are due for some sort of at least a dead-cat
bounce, enough to convince a number of undecided investors that
happy days are here again. Then I imagine we'll see a really scary
decline until the outcome of the November elections begins to take
on a hazy form in a cloudy crystal ball. Then I think we'll have
the usual monster rally that usually begins in the 2
year of a President's term and is swept along with various
taxpayer-financed stimuli to get the incumbent re-elected.
But the joy of cash is that, if history, my indicators, and my
projections are wrong, I can still move quickly to establish
positions anew. Stocks are like streetcars - if you miss one that
your broker says "is the deal of a lifetime," just wait till
tomorrow. He'll be calling you with one that is "even better."
11) What could go wrong with your pick?
The market could soar like a Roman candle from this point. The
horrible outcome of that would be - we only participated to the
extent our special situations did as well or better than the
market. We lost some opportunity. But losing opportunity is, in my
experience, a lot less painful than losing half the portfolio. You
still have all your marbles; you just didn't collect any more of
the other guy's.
On the other hand, if the market ratchets up and down and ends
up in the same place, we've avoided the gut-wrenching,
Tums-popping, and hand-wringing -- and can still buy in a month or
a year. And if the market goes down, we're the ones with cash in
hand and a sunny disposition looking to pick the flowers that still
grow amidst the wreckage.
I promised SA I'd still submit an article for their Just One
Stock series. And I promise you, at this time, in this kind of
market -- it will be a special situation precious metal, a special
situation commodity ETF, or a special situation short ETF!
: C-A-S-H is our biggest position. If you are interested,
please see previous articles for some of the other special
situations we own…
The Fine Print
: As Registered Investment Advisors, we see it as our
responsibility to advise the following: We do not know your
personal financial situation, so the information contained in
this communiqué represents the opinions of the staff of Stanford
Wealth Management, and should not be construed as personalized
Past performance is no guarantee of future results, rather an
obvious statement if you review the records of many alleged
gurus, but important nonetheless - for example, our Investors
Edge ® Growth and Value Portfolio beat the S&P 500 for 10
years running but we are flat in 2010. We plan to be back on
track as the year progresses and we put our cash to work but
"past performance is no guarantee of future results"!
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In all cases, we take our responsibility seriously to proffer
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whether we own or are buying the investments we write about.
At a Crossroad in Risk Sentiment