How to Be Sane In An Insane Investment Climate

by: TrimTabs

By Charles Biderman

Those of you out there who are sane-type investors should be worried about the fundamental investment problem you face. And that is how do sane people invest in an insane financial world? Stocks and bonds are up now for four years solely because of central bank rigging. At the same time, our leaders refuse to address the fundamental problem that the economies of the US, Europe and Japan will not grow fast enough anytime soon to generate enough taxes to pay current bills, let alone past due.

How individual investors have answered that conundrum appears to be put the money in the bank. Last year, over $700 billion went into bank savings and checking accounts and another $350 billion went into bond mutual and exchange traded funds. There is no doubt that many investors are so scared that they are literally doing nothing with their money other than leaving it in the bank.

Other than cash in the bank; which by the way means taking on the risk of inflation, a dollar plunging against gold and other currencies, what should a sane investor do in an insane investment world?

In a world where all the major central banks are printing huge amounts of money, gold stands out as a key core holding. Gold has sold off a bit recently but is still up 6% since BMP began at the end of May last year. I recommend holding gold equal to a quarter of your investments. And what is more, I would recommend not buying an ETF but rather buying one ounce gold bars from a reputable dealer at the lowest mark up possible over the spot price. However, the model portfolio uses the GLD ETF for pricing purposes.

If gold is key holding in a world of massive money printing, so should be inflation-protected assets. That is why 18% of the model portfolio is in the Vanguard Inflation Protected Bonds fund, VIPSX. Yes, inflation is modest now. But to imagine that rampant inflation is not bear by is foolish given that the FED, the ECB, and the Bank of Japan are all printing money hand over fist.

Stock prices are at five-year highs and the economy is barely growing. To be sure, Q4 results that are starting to be reported will look good. That is only because around $100 billion of 2013 income was recognized in 2012 to avoid taxes. What's more, some of that extra money also apparently went into stocks to start the year.

To me, that makes current stock prices insane and sets up a major decline later this quarter. But that does not mean all companies will not grow and prosper even if the bulk of the market drops. That is why 7% of the model portfolio is in TrimTabs Float Shrink ETF (NYSEARCA:TTFS), which invests 1% each in the hundred companies shrinking the trading float the most while only using free cash flow to do so. TTFS is up 12% since the model portfolio began. For the record, I am the portfolio manager of TTFS and CEO of TTFS sub-advisor.

In addition, I also have liked those stocks not only growing fast, but also gaining market share and generating lots of cash. Therefore the model portfolio includes longs Apple (NASDAQ:AAPL), (NYSE:CRM), (NASDAQ:AMZN) and Whole Foods (WFM).

To protect against the eventual market plunge, the model portfolio is about 40% to 45% short. The short positions consists of four ETFs that go up when the underlying goes down; the leveraged EURO short ETF (NYSEARCA:EUO), the big banks short (NYSEARCA:SEF), Emerging Markets (NYSEARCA:EUM) and Europe (NYSEARCA:EFZ).

Of course, if the stock market keeps zooming from here forever and ever, then the model portfolio will certainly underperform, but hopefully not lose too much capital. However, if higher gold and inflation as well as a market downturn are in the future, then the model portfolio should do well.