“Risk On” is a way of thinking about the Macro side of things; when the going gets tough, the tough get going? Well, when the going gets tough, its time to either short the ‘going’ or get the heck out of there.
I rarely make public calls on the stock market direction but I do do it from time to time when I think the Macro situation is Risk On. I made a public call in late 2007 on CNBC to get out of the market and in March 2009 to get back in. And again in June 2011 (to my advanced students who are taking CR600 – ‘Phil Town Live! – a twice a week live webinar with me during which I do my research and execute my trades) to get out … and then back in with my students in October 2011.
I’ve been looking at the Macro for months and finally decided a couple of weeks ago to get clear of the possible train-wreck that is our economic system. I went mostly to cash.
That means I sold a lot of very good companies including dividend producers, companies I never thought I’d be selling any time soon. But when you are in the business of allocating your own capital for your own financial future, Risk On is something you learn the hard way to pay attention to.
The first way to get Risk OFF is to buy great businesses when they are on sale. The next way is to Stockpile those businesses when unwarranted fear drives their prices down. The next way is to buy and sell options on those businesses you can put a value on whenever you see an opportunity driven by volatility and a price/value mismatch. The next way is to let dividends drive down basis even further. Low basis equals low risk.
But what do you do when there is Risk On no matter which way you turn? David Bach is a friend who writes great stuff to encourage people to ‘finish rich’, as he says. He recommends allocating your capital 1/3 to stocks, bonds and real estate and then ride it out because not all three will go down at once. That’s been a great plan for a long time but it may not be a great plan for Risk On like what’s coming. Could it happen that stocks, bonds and real estate all go down together? Think about this: The Fed stops intervening in the bond rates and bond rates go up so bond values go down, mortgage rates go up so real estate buyers can’t buy as much house for the same monthly payment, and the stock market reverses and goes down. Is that possible? Its not only possible, it’s the dreaded ‘no way out’ scenario the Fed is trying desperately to avoid before the election. So what then?
What then for me is to get to non-correlated investments, things that still pay well when the markets go down ... and get to cash. We’ll talk more about those kinds of more advanced investments as we go but for now, let’s just leave it at this. The corollary to Davey Crocket’s words to live by, (in case Davey Crocket’s TV show in the 50’s is just a little far back for you, here’s the words: “First be sure you’re right, then go ahead.”) is ‘If you’re NOT sure, then don’t.” These are Rule #1 words to live by. Right now I’m not sure about anything except that oil is likely to be higher in 30 years. So if I’m not sure and I’m following Davey (or Warren, for that matter) its time for me to bail until I am sure.
Now go play.