I am always surprised when someone I have known for a while asks me, "What are you doing and buying right now?" in the midst of an up market. I am pretty vocal about never buying an up tape or chasing a stock as it moves higher.
I buy shares that are falling with the full intent of buying more when it goes lower still. A stock that goes up right away is a disappointment to me, as it means I don't own enough. If the market is moving like it has this year, odds are I am not doing a lot on the buy side. I have learned the painful lesson that caution and patience eventually pay dividends.
I have opened a small position in International Shipholding (ISH). In spite of my prior difficulties with the shipping stocks, the stock is compelling from a long-term perspective. I added a little to my Cowen Group (COWN) position last week, as the long-term outlook there just keeps getting better. I bought a little Northfield Bancorp (NFBK), joining several other value types in the recent second-step conversion.
I also have bids in for several small banks that trade at healthy discounts to tangible book value. I have been tiptoeing into Pan American Silver (PAAS) at less than 70% of book value. I haven't gone into a buyer's coma as yet, but I am being very careful.
The truth is that this market scares me a little. Everyone you speak to expects a 5% to 10% correction. History tells me that when everyone expects the market to do something, it doesn't happen. The likely path becomes straight up. So we all sit on the sidelines cursing because we aren't long on max leverage -- or it crashes through the 10% down level to inflict as much pain in dip buyers as possible. I think I am prepared for either scenario, as any rally would have to be sparked by strong economic news. I am long a lot of cheap energy and materials names that would spike if that happens. If the market plunges, most of my accounts have 40% or more cash in them so I have money to put to work.
Everyone is operating under the understanding the 0% interest rates will continue to force money into the stock market. Fighting the Fed the past few years had disastrous consequences for anyone who sat it out or was unfortunate enough to be short the market in front of the tidal wave of cash. It may stay that way for some time, but eventually, either the last buyer is in or the Fed will change its policy. Either would be bearish for the stock market and could lead to the type of losses I spend most of my time trying to avoid.
Every time I find myself almost swayed to go all-in based on bullish Fed policy, I force myself to recall the words of one of Sam "The Grave Dancer" Zell. Earlier this month, he commented that the level of economic activity did not justify the current level of the stock market and that equities now resembled a game of musical chairs. He is quite correct, I think, in his assessment. The economy is still in better shape than it was in 2009, but the recent round of earnings reports showed little to no earnings growth. Companies continue to rely on cost-cutting and buybacks to engineer profit gains.
I am not more becoming a market timer any more than I am becoming a Red Sox fan. If I can find something cheap enough, I will buy it. However, my screens and searches are not showing up many safe and cheap stocks right now, and those that do appear, I already own. I am moving very slowly and staying small with what I do buy because I refuse to chase stocks higher.
I like to buy stocks at their 52-week moving averages, or multi-year lows. There almost none right now. About 70% of the S&P 500 stocks are up for the year and 404 of them are up more than 10%. Almost half of the issues in the index are up more than 20%. This is just not a buyers' market for stocks if you a price sensitive, deep value guy.
As Dr. Andrew Lo pointed out in his paper on the adaptive market hypothesis, the primary job of a long-term investor is to survive. If you can manage this, the profits will take care of themselves.