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I Like Cash.


After watching today’s markets, what would I buy or sell?

Gold?

Well, I didn’t buy gold at $1,000 two summers ago and I didn’t buy it at $1,400 at the beginning of this year so how could I buy it now at $1,700? (That’s ok. About 20% – 25% of any ‘Canadian index’ type of investments (XIC) is ‘Materials’ which include Barrick, Goldcorp, Kinross … kind of gold investing by default).

Gold 2000-present

Real Estate?

I’d like to add more REITs. But Canadian REITs (XRE) are still up more than +15% so far in 2011 (to Sept 22, 2011) after up +22% in 2010 and +55% in 2009. And while U.S. REITs (VNQ) are down about -1% Y-T-D, they don’t yield much. (U.S. REITs have smaller yields than Canadian REITs because they get a premium for growth). Think I’ll wait.

Commodities?

Well, ‘Canada IS Commodities’. Canadian investors, have an overweight (a significant allocation) to commodities … by definition. Again, there is about 25% Energy and another 25% in Materials in most all Canadian index-type investments (XIC). RRSP’s, CPP, other personal investments, home value and income all depend in some way on commodities, strong commodities demand and commodities prices. To add more commodities investments could be either timely and brilliant or terribly wrong from here. Below given volatility in commodities (and other sectors), do I really want more in my portfolio? No Thanks. Not just yet.

Basic Materials
-5.59%
Capital Goods
-4.20%
Conglomerates
-3.84%
Cons. Cyclical
-2.81%
Cons. Non-Cyclical
-2.37%
Energy
-4.78%
Financial
-3.00%
Healthcare
-2.11%
Services
-2.90%
Technology
-3.40%
Transportation
-3.13%
Utilities
-2.58%

Europe?

Maybe. EAFE (EFA) is off -18% Y-T-D and down almost -12% in September. But, boy, the outlook for Europe is bleak. I think I’ll wait. (EFA has about 20% weighting to Japan and 9% to Australia).

Bonds?

Tons of money, looking for both yield and a home relatively safe from volatility, has gone to bonds. This demand has driven bond prices up and yields to historically low levels. (Volatility … the good way). If I had Universe bonds (XBB), I’d sell them, take my profits and buy Short bonds (XSB). I’d use the short bonds as a sort of savings account that pays a bit of interest. (A GIC with same-day liquidity). I think I’ll continue to hold my U.S. Bonds (BND) … in case the U.S. gets worse or deflation stays a bit longer or the Loonie drops or … who knows?

Emerging Markets?

Maybe. EM’s (EEM) are down nearly -17% YTD and down nearly -9% month to date (after today). About as volatile as commodities. Hmm.

Gee, if I’m going to do all this foreign investment buying, I hope the Loonie stays close to par … oops … it dropped 2 ½ cents below par today.

What about cash?

Cash doesn’t pay anything but it’s not a problem … it’s an opportunity.

Have you ever watched ‘Pawn stars’ on T.V.? (Neither have I). One reason, I think, a pawn broker can make money is they have cash available when someone needs cash. N-E-E-D-S cash!

Then there’s Warren Buffett.

One of the reasons Warren Buffett is so successful, I think, is that he always has cash. C-A-S-H. Having cash when others N-E-E-D cash means he can command usury-like like rates.  He’s done it at least three times. He recently lent Bank of America $5 Billion in exchange for preferred shares that pay 10%. Nice. “Berkshire gets preferred shares with a yield that’s more than 10 times greater than the lender’s common stock dividend and warrants that allow Buffett to profit from gains in the share price.” Warren Buffett has C-A-S-H when those that N-E-E-D it will pay Warren’s price to borrow it. (The perfect opportunist).

After a day like today, maybe it’s time to think about bargain shopping … Warren Buffett style. I think I’ll re-visit my shopping list and wait for the seller(s) to come to the table. In the meantime, I think I’ll just continue to collect and hold cash.

Disclosure: I own XSB, BND, XRE, VNQ. For my complete portfolio click here.

Next time?
Risk management.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan

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