Have the Guts to Do Nothing

 | Oct 02, 2012 | 1:30 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

rsh

,

dell

The U.S. equity markets, by all accounts, experienced a fantastic third quarter, with the S&P 500 up nearly 15%. Stock prices are going up, so investors are somewhat calm. With record low interest rates, the Federal Reserve is doing what it can to push people into the housing market and equity market in hopes of higher returns.

Yet rising stock prices make investing very difficult. The biggest singular mistake investors commit during a rising stock market is failing to remain disciplined. Many investors start paying up for stocks for fear of missing out on further upside. Many investors delay selling fully-valued positions afraid to forgo any additional upside in a rising market. More still, many investors start looking high and wide for something to buy and, in the end, buying decisions are made not on rational analysis and valuation but the sensation that a rising tide lifts all boats. Out goes the discipline and in comes the confidence bias. The net result of this equation often ends in less, not more.

Loews CEO James Tisch says "when there is nothing to do, do nothing." By doing nothing, you are actually doing something:e exercising discipline. The opportunity cost of making an investment is sitting on the sidelines, preserving capital for the inevitable day when opportunities do arise. When Buffett folded his investment partnership in 1969, he really didn't show back up on the scene until 1974 when the U.S. was in the middle of a deep bear market. Perhaps he was nibbling between 1969-74, but it wasn't until equity prices were so attractive in 1974 that Buffett made his famous quip, "I feel like a sex-starved man in a harem with beautiful women."

Unfortunately, I'm finding no such pleasures in the markets today. One can often get a general pulse of the market by browsing the list of 52-week lows. By my count, I find fewer than 30 names on the major U.S. exchanges that are sitting at 52-week lows. For what it's worth, in times like this I periodically screen the list of new lows for any potential opportunities. Had you looked at this list throughout the year, you would have found names like Goldman Sachs (GS) and Bank of America (BAC) on it. Goldman is up 30% year to date while BofA is up more than 60% year to date. Today's 52 week list is thin and most names are names not familiar to most. The most recognized name on the list is Dell (DELL) and it will be interesting to see how Dell tracks in the next 12 months.

A controversial name on the list is electronics retailer RadioShack (RSH), which now trades at $2.33 down from $14 earlier this year. Tangible book value per share exceeds $7. The issue is that the amount of inventory on the balance sheet exceeds the company's equity. Business is struggling to say the least and net debt stands at $150 million. Had not been for the poor decision to take on debt to buy back stock and pay a dividend, the balance sheet would be much more attractive. Nonetheless, the equity is not worthless -- not yet anyway -- so the price bears watching. If one were to discount the value of the inventory by 50% that would equate to a $400 million reduction in equity and the share price today would equal this adjusted book value. The CEO has been removed, but the CFO has assumed the role, which is nothing to be encouraged about considered the poor capital allocation going on at the company.

Humans by nature like activity and the stock market provides plenty of that. Watching the markets advance while your cash sits idle seems to always look like a dumb thing to do. But there is value in patience and discipline. Attractive pockets still exists today -- financial and natural gas are two quality areas -- but overall greater discipline is required today to successfully navigate this market.

Columnist Conversations

GS has cleared the important hurdle on the way up which increases the odds for an eventual rally towards the 1...
A good quarterly report has sent shares of Calamos Asset Management (CLMS) sharply higher. CLMS was up about ...
Electronics distributor Ingram Micro (IM) reported better than 16% growth in its Q3 sending the stock up about...
Market posting decent day considering Ebola getting headlines again. Believe investors have learned not to pa...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.