Friday while the S&P 500 (NYSEARCA:SPY) was working on a new high, I stuck to my knitting and closed out a position in Bemis (NYSE:BMS), based on valuation. That left an empty slot in my Synthetic DGI Portfolio, which I filled with Darden (NYSE:DRI).
One of the problems with a portfolio strategy that builds off a screen, and suspends the analysis of individual holdings, is that you do things you wouldn't normally do. Bemis is over-valued by my preferred metric, and while it is optionable, there are no LEAPS and the spreads are too wide.
Bemis had gone up since I opened the position, but the hedged nature of the diagonal spread, plus a market maker who was intent on collecting his cut in full, reduced my profit. It's too bad, sometimes the training wheels get in the way.
Running my screen again at Portfolio123, Darden showed up, so I went for it. It's fairly valued by my methods, which is fine, and LEAPS are available. I'm long deep in the money LEAPS and short out of the money calls, the usual diagonal spread.
Watching CNBC, they were fairly hyper about the new highs. As a practical matter, the market is almost exactly at fair value, by my methods, by Morningstar's methods, or by any other common sense method out there. I'm not talking about Shiller, and CAPE, or Grantham, or Hussman, or Rosenberg, or Roubini, or any of the doomsayers cult leaders.
My thinking is, that with the market at a midpoint, you can't expect much more than 7% annualized - 2% real growth, 2% inflation, 2% dividends and 1% financial engineering. That 7% comes with the risk of maybe 35% down if something funky comes out of the woodwork.
Doing the Chuckie Wuckie, the investor can dance while the music's playing. I'm dancing in a corner, with a hoard of cash, and my long-term holdings in S&P 500 type index funds. A part of my play money is in the Synthetic DGI Portfolio, where leverage will help it respond to a rising market, while the defensive nature of the stocks selected and the options strategy employed will help me reduce losses in the event the market tanks. It's kind of a barbell approach.
The most likely scenario is that the market continues upward, with the occasional dip to suck in any remaining cowards from the sidelines. It could go on for a while. I stopped doing bullish macro analyses when the market got into the fair value area by my calculations, but if it goes up to over-valued you could see 2,000 on the S&P before you see 1,300 again.
I was rummaging around in my drafts for articles that never where completed and published. One of them caught my eye: it was titled "Stop Buying Cheap Stocks - You'll Make More Money." Apparently I had done some backtesting to support the idea, and developed an impressive chart, for which I am now unable to locate the supporting data.
Then I started going over my old articles, many of them on value type stocks, comparing my old target prices to current prices, and patting myself on the back, and wishing I hadn't sold out so early, and so on and so forth. The targets were good, very good. Of course two years ago if you had the macro call right you could just throw those targets up there based on common sense and generic projections, there was no rocket science, it was hard to miss with so many tempting targets.
I dislike holding cash as cash, with interest rates as low as they are. I've resisted the urge to do something with fixed income, which is finally starting to look like a good decision. But when I think back to the depths of the financial crisis, $50,000 was a lot of money then, if you had the courage (or desperation) to put it on the table and lever it up.
I'm much more risk averse than I was back then. I don't think it's age per se: I have a unique combination of the natural impetuosity of youth with the reduced cognitive functions of old age. It's more about relative well-being. I have enough to cover my retirement now, and I don't want to lose it. Five years ago my retirement was in a smoking crater, and I looked at the rewards for even a mediocre recovery and went risk on and stayed risk on for a long time. That was then, this is now.
Disclosure: I am long SPY.
Additional disclosure: I'm long the market, via Vanguard S&P 500 index funds and value funds, also long various dividend growth type stocks by means of diagonal spreads. I have some reservations, expressed by holding above average cash.