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It is very hard or impossible to time the broad market consistently — there are no famous investors that got rich by consistently knowing what the broad market would do next. This only makes sense, as there are just too many variables in the broad market. But there are many famous investors who... More
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  • What Would You Do?  1 comment
    Jun 28, 2014 1:22 AM | about stocks: VO, TNXP, NWLI, RGA, ENH

    I had an email:

    I was really looking forward to the VO article because I'm finding myself with some cash right now and not sure where to park it. However that's really for retirees and that's not me just yet. If you don't mind I'll give you a quick rundown of my situation.

    Income:80-90k, 29 years old
    Just sold house about a month ago and have about 150k liquid from equity (way too much I know, but it scary to really do something with it). Stock are very expensive right now etc etc...
    I have about 100k invested. (mixed: safer oil and some more speculative positions...tnxp)

    Happy to answer!

    150K liquid and you are 29, you are ahead of the game my friend. I'll give you some standard answers and my own fearless answers.

    "Stock are very expensive right now etc"

    The great value investors will generally tell you that when it looks like cash is the best bet, usually a mixture of cash and stocks does better. Bull markets historically go on longer and stronger than their value metrics would prescribe (this is mostly Bruce Greenwald and Ken Fisher I'm channeling here).

    I think you should be 100% invested in stocks at your age, it's hard to time the macro moves, and there is evidence that the greater risk is missing the upside. I also think that a PE of around 20 for the S&P is going to be a bit of the "new normal," with bonds yielding so little money has to go somewhere, you could even argue that stocks are pretty undervalued relative to fixed income.

    So understanding that you (1) have a long time horizon but (2) see the markets as expensive, I would:

    -Pick stocks - You have a position in TNXP, this is a stock with it's own trajectory, what the broad markets do will not be this stock's fate. I would pick your very favorites, six or less like a good Buffett disciple, and see what kind of diversified portfolio you can make of stocks that have their own trajectory.

    -Balance cash and extreme diversification for the rest. You know I like VO for a US index fund, but you could spread some around in Vanguard's VXUS and BNDX - the total international stock market and bond market. Very cheap extreme diversification.

    Some form of that should give you the upside a 29 year old needs, but enough safety to not take too much of a hit whatever happens.

    Hope this helps, all the best!



    I'm going to be so bold as to suggest two more equities that I've had my eye on.

    I've been slurping up David Merkel's Alephblog, he's a value manager and one of the most qualified voices in the insurance industry, and he likes National Western Life (NASDAQ:NWLI) and Reinsurance Group (NYSE:RGA).

    His thoughts:

    National Western Life

    Reinsurance Group

    Basically he likes NWLI as a conservative life insurer that has a long record of taking appropriate risks. They trade about two thirds of book value and PE of under 10. Life insurers have to sit on a ton of bonds, that's why so many trade below book, but this is a well managed and quite profitable company. It's also closely held by insiders and unfollowed. One additional point is that different lines of insurance don't mix well with certain other insurance lines, and this is a pure life insurerer with simple products.

    Then with RGA - reinsurance is actually the business that trades more like life insurance. Life insurance company values are generally heavily influenced by the future returns projected for their vast holdings (mostly bonds). These days with bonds paying so little that value is down. But a great fixed income game is providing life insurance - collecting more in premium value vs expected payouts to policy holders. Reinsurers are actually the companies that most resemble this model, and Merkel's favorite is RGA.

    Am I long these companies? No, I'm too active and they are too boring, but they look like excellent long term holdings.

    They both will trade with financials, you could combine the two for your financials position, and consider it advantaged bond exposure as well..


    Might as well mention the other insurer on my list, also from Mr. Merkel, Endurance Specialty Holdings (NYSE:ENH).

    His thoughts.

    He tells a story about when he first started in the insurance industry someone told him that Property & Casualty insurance is not "real" insurance - if the companies lose money they just raise prices. The implication being that rather than being able to accurately forecast outcomes, they charge a number and just raise it if they are losing money.

    He says that while that's not completely true, the best money is in P&C.

    ENH for example provides crop insurance. How do you insure that? Basically you have to err on the side of favoring yourself and charging too much.

    So there's a P&C insurer to go with a Life Insurer and Life Reinsurer, each with different risks - interest rate (Life), mortality (Life Reinsurer), and crops (P&C).

    Not a bad little self-constructed insurance company..

    Disclosure: The author is long TNXP.

    Stocks: VO, TNXP, NWLI, RGA, ENH
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  • JNye210
    , contributor
    Comments (13) | Send Message
    I am in a similar situation except I don't have that pile of cash from the house. But my other 100k is 100% invested in stocks, some risky ones too. At our age and income level and job security, mine is good, we can afford risk. If I experience a downturn I can wait. I don't need the money anytime soon. I can make more. Apple is looking good to me right now, I think its an easy 10-20% win by December. Lonterm even better. Good luck.
    28 Jun 2014, 08:42 AM Reply Like
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