The Market Scares a Seasoned Investor Who Advocates Holding Cash Right Now
After watching the stock market drop 50% twice in the past 10 years, who can blame investors for wanting to stay in cash. At least you know you won’t lose money if you stay in cash. Many advisors believe this is not rational and that eventually people will put their cash back in the market. But Chris Rees, a seasoned investor and Marketocracy Master, believes holding a lot of cash makes sense right now.
Over the 10 years Chris Rees has been with Marketocracy, his model fund has averaged just over 23% a year. What’s even more impressive is that he did it while also holding about 20% in cash on average. Today, Chris’ portfolio is 35% in cash, but unlike most investors holding onto cash, the rest of his investments have kept up with the market. For the last five years, Chris’ fund returned an annualized 8.75%, outperforming all but 54 domestic equity funds (excluding specialty funds), according to Morningstar. In contrast, the S&P 500 averaged slightly less than two percent a year.
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I recently asked Chris why he is holding so much cash right now. Here’s what he had to say.
I think it’s the worst market I’ve seen in 20 years. If you think of your house, you’ve lived in it for 20 years. You could switch all the lights off, and you’d still be able to find your way around. You’d even still be able to find the mop, the toothbrush, the light switch, where you put your shoes, and the refrigerator. Now imagine someone takes your house, turns it upside down, then onto its side, then shakes it violently for an hour, and then sits it back down. The lights are off, and you can’t find anything. Random things are in illogical places, and nothing makes any sense. Are you standing on the floor or the ceiling? That’s the way Chris Rees feels about the current market. He thinks it’s all screwed up.
Anyone who has worked hard, lived within their means, and saved over the last ten years is getting taken advantage of, while anyone who screwed up or lived beyond their means is getting bailed out. It’s an upside down economy.
The government is printing money while the economy stagnates, and this government solution to deal with too much debt is just creating more debt. It’s an interesting situation when the banks are bailed out with free money, but businesses can’t get a loan. Even if a business could get a loan, they now have more incentive to invest abroad than in the United States so we are exporting liquidity and creating bubbles and instability everywhere.
Chris says that since October 2008, the goalposts have been moved so many times he’s “blurry eyed” trying to keep track of them. Incentives, likely future taxation, and future regulation are all in a flux. Profit is capitalism; losses are socialized. It’s all upside down.
There’s nothing to invest in, because right now the market is too expensive. Only the continual money printing is keeping the market up. The more the government prints money (QE1, 2, 3, 4 etc.), the closer we move to a likely Argentina Armageddon where all bets are off. However, if we stop printing the money, and we must stop the printing, the economy will tank and the market along with it. But at least at that point, we would be living in a real world instead of an upside down fantasyland where the entire world is becoming more unbalanced each day.
If we get more QE, the market may go up but for the wrong reasons, and Chris won’t buy into that. Even Greenspan has said that more QE is a dangerous game to play.
So how does Chris position his portfolio right now?
Nothing (except natural gas) looks cheap. Just about everything else looks too expensive. Money earns nothing. Sitting in dollars is not Chris’ favorite idea, but it’s the only idea he has at the moment. At some point, he expects to see something hit the fan, which will give him the opportunity to put some capital to work. Something always hits the fan somewhere. It’s human nature. What’s not human nature is having the tough discipline and patience to stand aside and wait for it to happen.
At Marketocracy, his 10STX portfolio is limit cash (35%), short gold (DZZ), long natural gas (UNG), short the market (TWM), and long a too big to fail banking disaster (BAC).
Amazingly, even with 35% cash Chris is not settling for todays’ historically low interest rates; His Marketocracy portfolio is still up more than 4% YTD.