Now Is the Time to Do Nothing

 | Feb 03, 2012 | 11:00 AM EST
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Here at Chez Melvin the phones would be ringing off the hook (if they still had hooks) as friends and associates call to ask the important questions of the day, if not life itself.

Why have the Nationals been able to build a great team in a few short years when the Orioles have been unable to do so in 15? Can Kentucky run through the next few tough weeks of SEC competition? When will the next Randy Wayne White be released (March 6)? Why is "Survivor" still on TV and what does that fact say about our culture? What do I do in the market right now?

These are all great and important questions. But for our purposes the last one is the most important. I field several calls and e-mails a day asking what we should do with our portfolios and new cash right now. For me, that is an easy question to answer, although I usually find my answer is not that popular. If you are an investor or dealing with the longer-term portion of your portfolio, the correct answer is: do nothing. There is no need to buy or sell anything right now. For those of us who are value investors doing nothing right now is mandatory.

That is not a popular answer when the market is running higher. Rising stock prices seem to bring out the inner trader/gambler in all of us. The market is open, the heads are talking, the tape is ticking, let's do something! If we listened to our rational brain, investors would get excited and look for things to do when the market was getting routed and prices in a free fall. It hasn't worked that way for the three decades or so I have been around the markets and it probably never will. Fear and greed cycles are eternal, it seems.

Let's step back and take a reality check. If you used last year to tiptoe and scaled into very cheap stocks on market declines you are having a tremendous month. Foreign financials like Royal Bank of Scotland (RBS), Bank of Ireland (IRE) and Aegon (AEG) have been rocket ships for the past six weeks. Shopping center REITs like Kite Realty (KRG) and Cedar Realty (CDR) have been on fire the last three months. If you bought stocks like Seagate (STX) when they were accidental high yielders in 2009, you have more than tripled your money. We had a flurry of takeovers at the end of the year in names like Winn Dixie (WINN) and Force Protection that were very profitable. If you stayed focused on safe and cheap while staying small and moving slow you have had a great three months.

Enjoy it, but there is no need to do anything right now. The stock has had a sharp rally since in the past three months and it looks like it may continue. Most of the economic and news releases we see every day are just noise for long-term investors, but they are variable in most black boxes and valuation models and right now they are bullish. When I look at the few technical indicators I use they are approaching oversold levels, but they are not quite there. History tells us that markets will become overbought and stay that way for a period of time. The US central bank is committed to ZIRP until the Cubs and Orioles meet in the World Series and that is supportive of stock prices right now.

Europe has turned on the faucets and it will be some time before they can even consider turning off the liquidity taps. Stocks have moved higher but most of our value stocks are not egregiously overpriced to the point where selling becomes a necessity. That may change as the investors and traders get more excited and greedy. And when it does I will start selling overvalued stocks.

Of course, most of them are not so cheap that you must own them here either. Only a few very small microcap special situations and banks are so cheap I feel compelled to enter buy orders. For the most part I am content to sit on the stocks I have now and not chase the market higher. I will collect dividends and stockpile cash for the inevitable decline. I have no idea when it will happen, just that it will at some point and I want to have lots of ammunition in the form of cash. I am not worried in the short and medium run of the interest rate on cash any more than I am by the fact that none of the tools in my shed earn interest.

Just because the market is open does not mean you have to do something. That's fine if you are a short term or day trader. But investors should resist the urge to do something just because the doors are open.

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