There was a lot of talk and discussion around Chez Melvin on a subject about which my wife says I am an expert. The discussion was about the art and necessity of doing nothing.
When applied to the stock market, doing nothing is the most difficult trade of all for most of us. There are extended periods of time when that is exactly the right course of action, but the need for action often keeps us from doing as well as we should, because the casino in Lower Manhattan is open.
The stock market has moved solidly off its lows and appears to be in the middle of one of those nice, orderly, low-volatility advances. I cannot find a compelling reason to buy or sell much of anything right now. The advance has taken most stock out of the super-cheap, surrounded-by-pessimism valuations where I like to be. It has not yet gone high enough that many of my stocks are trading far above tangible book value and need to be sold. Volatility has dropped down to the teens, and opportunities for option selling are very limited at the moment.
There a lot of things to worry about, including, of course, Europe and the Middle East, but nothing in the individual valuations of my stocks suggests that it is time to sell or reduce my positions.
One of my friends used to be a floor trader and is a very high-energy guy. He just could not understand how it was possible to do nothing. The markets are open, and this is out of line with that, and this stock is lagging its sector, and there is stuff to do. I simply asked him if any of these out-of-line stocks was trading below tangible book value and if all this gyration was making him any money right now. The answers were no, and not really. In truth, since "black boxes" and hedge funds remove most of the statistical and arbitrage stuff that used to work, he would be better off doing nothing until fear or greed offer a potentially profitable opportunity to make money.
How on earth do you do nothing? I spent my do-nothing time reading, thinking and planning. I know that at some point, fear or greed will rise up and either carry stocks to stupid prices or drive them so low that they become too cheap not to buy. In the meantime, I hold my stocks and read everything I can get my hands on about the world that might help me locate the next cheap thing. In recent weeks, this has led me to a lot of reading on energy and related companies. In his latest shareholder book (it's way too long to call it a letter), Jeremy Grantham points out the BTU price equivalent ratio of oil to natural gas is at a 50-year high. As he correctly states that there has to be a way to make money off of that.
I have started to dabble in and talk about natural gas. The last two buy orders I entered this year were both gas-related companies. EXCO Resources (XCO) saw its stock price fall, and I added a little to my position. It is a cheap stock, and both Wilbur Ross and Howard Marks of OakTree Capital have been buyers in recent months.
Penn Virginia (PVA) is more of a distressed company whose management is implementing a turnaround plan to focus on oil and liquids drilling while holding natural-gas properties as an option on eventual price discovery. If it works, and I think it will over the long run, this stock could have spectacular returns over the next five years or so. For the most part, however I am sitting, watching and trying to read and learn about natural gas and energy trends and pricing. The stocks in the group are cheap but not cheap enough.
I spend a great deal of time reading through the various economic reports in order to get a better picture of the world. I consistently come up with a picture that is better but not good for the U.S. economy. I read a lot about real estate markets these days, and in a rare point of agreement with Warren Buffett, I believe that real estate may still be in a bear market, but it will eventually turn, and there will be a tremendous amount of money made by those who bought early and dealt with the short-term price locations.
Doing nothing does not mean suspending operations. It means not reaching for the buy and sell key. It means not predicting what the market will do but preparing yourself to react and profit from what it does do next.