Investing can be like sports and in the long run being defensive will beat aggressive and offensive tactics chasing returns. With a market that is stretching valuations on little fundamental economic good news, many great value investors hold substantial cash positions.
One great value investor is James Roumell, founder of Roumell Asset Management, who updates his investors in a quarterly letter available on their website. This is a must read for any market practitioner. In his latest version, he outlines their reasons for holding larger amounts in cash including:
- The Federal Reserve tapering
- Overall market valuations exceeding GDP.
- Margin levels at abnormally high levels
- Investors already holding historically low levels of money market investments
One investment idea to note is the American Select Portfolio. (SLA)
SLA is a closed-end fund that invests in mortgage instruments and preferred securities. The fund holds a number of illiquid investments that Roumell suggests are often conservatively valued. Add this to an already healthy 13% discount to Net Asset Value and you can see why this presents an attractive opportunity to investors.
Individual investors would be well served to take a defensive approach as many traditional valuation and historical ratios point to a stretched market. Having the patience to select great bargains when the time is right means keeping your powder dry in markets like these.
Roumell's letters can be found here.