Buy & Hold Doesn’t Work Very Well Anymore
I used to be a die hard “buy & hold guy”. I worshipped at the altar of Warren Buffett and tried to buy only stocks that I thought I could hold forever. While I will hold a stock for a long time it is a rare occurrence. I reserve the buy & hold methodology for that rare company that is of the upmost quality. I currently hold two stocks in this category. Both are small caps and I’ve held one since 2001 and the other I’ve owned since 2006. They both share the same qualities. They are small, excellent management, absolutely no debt, have a nice chunk of cash, are growing at a decent clip, and aren’t self promotional. These kinds of companies are harder and harder to find every day.
Markets Are Manipulated
The most important thing I’ve learned from Mark Cuban is that the markets are highly manipulated. The investment game has grown so large that there is now so much “big money” sloshing around out there that the small investor is for the most part at a disadvantage. Peter Lynch used to say that the small investor had an edge because they could invest or do things the fund managers couldn’t. While this is true, nowadays the big money is out there manipulating the markets. Whether it’s the Federal Reserve pumping money into the system creating rising asset prices or the high frequency trading that is out there robbing investors with fake volume and bids, the markets are constantly being manipulated. With the government artificially suppressing interest rates, people are losing ground to inflation in their savings accounts and feel forced to participate in the market. This creates manias and bubbles by having people chasing the hot asset classes. It’s usually the small investor that hops on the bandwagon as the big money pulls the rug out from underneath them.
Pick Your Spots – Have a Specialty or an Angle
So what is the average investor to do? We’ve just spent over a decade where the stock market is below where it started. The “financial experts” who are “looking out for you” will tell you to just put as much into your 401k or mutual funds as you can each month and everything will be o.k. Funny thing is, is that they are only worried about their assets under management and gaining fees off of your account. Very few people in the financial industry have your best interests at heart. You have to have an angle or a specialty to trade this market. Figure out what it is and become an expert and be good at it. It could be trading on unusual options activity, investing in spin-off stocks, high yield dividend stocks, merger arbitrage, micro caps, sectors, or whatever you can find where you have an edge to protect yourself from the market manipulation. If you can be focused and knowledgeable you can trade this market.
Cash is an Asset Class
If you can learn one thing from Mark Cuban it is that cash is an asset class. You don’t have to be 100% invested in the market at all times. Cuban stresses that you have to have cash to take advantage of opportunities. The more cash and less debt you have the more likely you will be to take advantage of a tremendous opportunity that could come your way. While Cuban is a billionaire and doesn’t have to worry as much as the rest of us about getting a return on his money, what he says makes perfect sense. Sometime, whether it’s tomorrow or three years down the road, you will get an opportunity to deploy your cash. It could be a market crash or a stock specific crash that presents that opportunity to you. It could even be a business opportunity that comes along that had it not been for hold some cash, you would’ve missed out on. I’m not advocating sitting in all cash but just be mindful that cash is an asset class that could pay big dividends down the line when you need it the most. As Buffett says, wait for the right pitch and then swing. While Warren Buffett was the best investor of a past generation, Mark Cuban is one of the best of our generation. Read and listen to everything he has to say. You will be surprised at how much you learn.