Swing, You Bum!

I hope you had a fun Halloween!

60% Cash

For most of this year, I’ve had most of this account in cash.

At the end of last week, 60% of this account was in cash, earning nothing.

With my new strategy – a concentrated 12 stock portfolio of wonderful companies purchased at wonderful prices – it is going to be difficult to deploy all of this cash right away.

I am on the hunt for rare birds – wonderful companies at wonderful prices. My goal is to fill up a portfolio with 12 of these positions. The problem is that these situations are rare, so it will take some time to find 12 of them.

So far, I have 4 of them: Charles Schwab, General Dynamics, Enterprise Product Partners, and Biogen. I need 8 more.

I find myself going through many different stocks, and passing up on most of them. Each week I am researching at least three different companies. I am saying “no” a lot.

This is a sharp contrast to my old approach, where I would settle for lots of subpar stocks just to fill up a portfolio and hit the 20-30 stock target that you’re “supposed” to own.

My biggest hurdle – only buy positions I would be comfortable holding for 10 years if I was forced to – is particularly rigorous.

I am finished with settling with mediocrity in my portfolio. I am no longer going to settle for 80% conviction. If I buy a stock, I want to be 100% comfortable with the business and the valuation. I only want to swing at the fat pitch.

Warren Buffett explains this philosophy better than I can: “The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, ‘Swing, you bum!” – ignore them.”

The Temptation to Swing

With that said, being 60% cash is a tad ridiculous. It’s a stealth form of market timing, which is something I want to move away from.

If there is one thing that 2020 has taught me, it’s that I am unable to time the market and predict macro. Market timing isn’t something I should do, whether it’s overt (like my purchase of short ETF in March), or stealth (like keeping 60% of this portfolio in cash).

Another issue with holding all of that cash is that it tempts me to buy stocks that I don’t feel 100% comfortable with owning.

This leaves me with a unique problem: what to do with 60% of my portfolio that is sitting in cash, earning nothing?

I could simply buy SPY, but that’s not something I want to own. The market is ridiculously expensive and I don’t think market cap weighting is the optimal way to invest, as I’ve talked about on this blog.

I also don’t want to go 100% small value. I still want something that will be cushioned if stocks drop, so I have “dry powder” to pile into wonderful businesses at wonderful prices. Small value isn’t a place to hide during a severe recession.

The Weird Portfolio Solution

Fortunately, I already had a solution and it was staring me in the face: the weird portfolio.

Why have most of this account sit in cash, when I’ve already developed a sensible asset allocation: global small value, real estate, gold, and long term treasuries?

This is an asset allocation with built in protection for multiple economic environments and an asset allocation that I am confident will grow over time.

Why not use the weird portfolio for all of this cash I’m sitting on?

Rather than hold cash while I await the opportunity to buy wonderful businesses at wonderful prices, I will hold the weird portfolio instead.

That is what I do with the rest of my money outside of my cash emergency fund, so I will do the same for the cash in this account.

I think it will prevent from settling for subpar businesses or subpar prices.

The urge to “swing, you bum” is strong and hopefully this will reduce the temptation to swing at subpar pitches. I only want to swing at the fat pitch. While I wait, I’ll camp out in the weird portfolio.


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