Listening to the media coverage of the annual Berkshire Hathaway (BRK.A) meeting or party, it reminded me of a huge part of a successful investment strategy, which is a key to really making good money in the market. It's not the accurate dissection of data of a specific company, although that is important; neither is it the identification of a firm that has a solid, competitive moat in place that guarantees long-term growth. That is also vital to investment success, but it's all secondary to what we're going to talk about in this article.
All of these things and many others, as far as having a portfolio of stock-investing possibilities to put money in, are secondary to the most important part of the investment equation of all: having the money to invest when terrific opportunities arise.
Investment Opportunities of a Lifetime Come Frequently
Many investors think of the big one that got away, just like an avid fisherman does. But even if an angler loses a big fish while battling it, there is always the belief deep down that the next fish could be the fish of a lifetime. Most investors, unfortunately, don't think this way. When I mention an opportunity of a lifetime in regard to investing, I'm referring to fantastic entry points. These entry points happen quite frequently, although they don't always happen in the same sector.
For example, on June 1, 2012, you could have acquired shares in Coca-Cola (KO) for $36.55, and as of this writing it is trading at over $42 a share. In 2009, when the stock fell to a five-year low of $19.55, an entry point there would have more than doubled your investment today. Those with stars in their eyes may not be too impressed with this because they may take periods of time with extremely risky companies where they would have made up to ten times their original investment, and even more. These are speculative and unrepeatable events, and so are in no way an opportunity of a lifetime that can be counted on for the investor. We want trends that are able to be identified and invested in on a continuous basis across a variety of investment sectors.
Now as to Coca-Cola, it has been on a big upward trend since 2009, and continues to perform well. There are a number of blue chip stocks that have performed in a similar manner, including Merck (MRK), Johnson & Johnson (JNJ), and Pfizer (PFE), among many others. As for blue chips stocks right now, they have become expensive, and investors will have to closely watch the sector, which overall has pulled back over that last couple of weeks over a solid run. There are always exceptions within any sector, but overall this is a time to be a little cautious with good dividend-producing blue chip stocks.
The point is there were several entry points over the years, as the five-year charts below confirm, when the share price of the companies were inexpensive; and those entering at close to those points far outperformed those who were dollar cost averaging. As Warren Buffett continues to say, the market will always go higher. But those getting in at good entry points will be those that benefit the most.
Dollar Cost Averaging
So am I saying dollar cost averaging is a bad strategy? Not at all. For most investors, this may be the best way to invest. What I am saying is those that are patient and can wait will make a lot more money over time when investing at times the share price of a company drops in a significant manner. It does require a little different psychological makeup to engage in. Both strategies will work, assuming the company invested in is the right one, but investing when the share price is down brings better returns over time.
The other thing to consider is I'm not really talking about attempting to time the market here. It's the identification of a temporary downward move or correction being referred to. Investors shouldn't attempt to reach the lowest entry level before investing, as that brings investment paralysis. If you're convinced the stock will continue to rise, what's being looked for is getting in at a decent price below recent levels, not to try to get the absolute low share price point. That's just luck, and isn't reproducible, a word that needs to be embraced by investors.
For example, anyone investing in blue chips in 2009 would have enjoyed some awesome, safe returns, with many companies doubling in share price since that time. But those that got in at pullbacks made more money than those that didn't.
Trends and Identifying Them
Is there even a better way to invest than buying on dips? Yes. It's not as easy and requires a lot more patience, but it can be done. We talked about blue chips and 2009, and that's a good example to work with. We were at the tail end of a terrible recession, and it was obvious to most that at times of uncertainty like that, it would be the blue chips that would lead the market out of its doldrums.
While not attempting to time the low, when stocks dropped big in the early part of 2009, it signaled the market was preparing to reverse direction. Not long afterwards, in March, it did in fact start to rebound, and those buying in at that time have profited the most. That's better than buying on dips because as the share price moves up, the dips become more expensive. Again, it's patience that brings these fantastic opportunities, and watching the performance of a sector in light of the macroeconomic circumstances existing at the time is the key.
What's the Trend Now?
Watching the performance of stocks lately, it appears the money is migrating from blue chips to big tech companies. That means people are getting nervous about the surge in blue chips and are putting their money elsewhere. It also implies investors are willing to take on more risk at this time.
A look at the 3-month charts below of Apple (AAPL), Microsoft (MSFT) and Intel (INTC), suggest the big tech stocks have started an upward climb. If they perform similar to blue chips over the last couple of years, a lot of money could be made in this sector.
If this is what is happening, this is the time to buy, as the share price of most of these big tech companies have jumped since the middle of April. Don't get too distracted by what I think is happening now in big tech. What is more important is your own understanding and insight for a specific stock or sector. What is important is accurately identifying a company or industry trend, not what the specific company or trend is.
Why Investment Money Should Sleep
Now to the overall theme of this article: should money always be working for you? My answer is a strong no! The reason I say that is when opportunities like those available to us now arise, the only way they can be taken advantage of is to have cash on hand. If all our money is tied up in investments, it's more difficult to extricate it. Even though it's psychologically difficult to do, it's a good idea to have money that is available for immediate investment. That usually means having it in a type of account that is making very little for you. In the current low-interest rate environment, this is especially true.
Other than the ability to successfully identify solid companies and stocks that will perform well over time, the key secret to Warren Buffett and Berkshire Hathaway is the discipline to sit on money doing little for it, while waiting for those once-in-a-lifetime opportunities to come along. As Buffett and Berkshire have proven, they come along quite frequently, as we simply must have the patience to wait until they do.
This is the secret of why it's important to let money sleep: to have cash on hand. Those that do will far exceed the returns of those that are impatient and believe money should be always working for you, and by working for you, I mean invested somewhere. An exception to this is, of course, when we do have cash on hand and invest it in the right company and sectors at the right time. At that time we've run out of cash, but have it working for us in ways those less patient and disciplined will never have.
By the way, cash on hand isn't a reference to money you have set aside in case of emergencies. That's not investment capital. Cash on hand is money set aside for opportune investment moments.
Cash on hand is far more important than the majority of investors realize. While it can be a defensive position to protect and save capital, it's far more useful and important for investment purposes. The market will always rise and fall, as will various sectors. Those movements, accompanied by investor fear or optimism, provide awesome entry points for those prepared for it. No matter how much money you have to invest, the practice of having cash on hand is extremely important, and those that do will find opportunities of a lifetime on a fairly consistent basis.
Being able to accurately identify good companies and trends is worthless if you have no money to invest during those profitable moments. This may seem obvious to most, but the fact is few work on the discipline to position themselves to be ready for terrific opportunities. Those with the discipline to sit on cash and wait for these types of moments outperform those that can't watch their capital temporarily do little for them. Be one of those with discipline.