Banking Bucks Until The Next Big Pullback

by: Mike Nadel

I don't know about you, but I'm hoarding money.

Oh, I might spend a little if the market hands us an almost-too-good-to-be-true deal, akin to Walgreen Co. (WAG) at $29 back in June. Or I might add a tad to one of my existing holdings if the price seems decent. But I'm thinking now is as good a time as any to build a stash o' cash.

With the European financial crisis ongoing, with China's economy slowing and with political brinkmanship threatening to push America over the dreaded "financial cliff," it's difficult to imagine the market continuing to creep upward without a pretty significant interruption.

Please note that I said interruption, not implosion. At least I hope we're not talking about Great Recession Redux. Maybe it will be more like the market correction of August-October 2011. Or maybe it will resemble this past spring's even briefer, less painful pullback.

Whatever the form, something's gotta give, doesn't it?

Since adopting the Dividend Growth Investing philosophy at the start of the year, I gradually have sold off many long-held mutual funds while researching and buying individual stocks. The goal is to build a portfolio of stable companies with a history of inflation-beating dividend growth. Eventually, those quarterly payouts will complement the pension and Social Security payments my wife and I will receive.

When I look at the 25 holdings I've amassed, however, most are within spitting distance of their 52-week highs. Many are close to three- or four-year tops. Additionally, when I assess the dozens of companies on my watch list, few are fairly valued, let alone undervalued.

Looking back at several recent purchases, I'm not exactly turning cartwheels. Given the prices I paid for General Dynamics (NYSE:GD), AstraZeneca (NYSE:AZN), McDonald's (NYSE:MCD), Coca-Cola (NYSE:KO) and Kinder Morgan Management (NYSE:KMR), I now wonder if I was bored, impatient, foolish or some combination of the three. Ten or 20 years from now, I'm pretty sure I'll be happy I bought those companies, but it's now obvious that my twitchy finger hit the "buy" button at less-than-ideal entry points. I find myself wishing I had waited for the inevitable pullback.

Not long ago, I wrote an article headlined Bargains Do Exist In Just About Any Market. And I still believe it's true. I'm sure you and I could find reasonably priced, quality companies right now. But what if those same quality companies become even more reasonably priced for those with just a little patience? Would it be worth the wait?

The answer here is "yes."

I have sold off one mutual fund, significantly trimmed my share of another and plan to dump my one remaining ETF sooner than later. I also have placed a limit sell order to reduce my stake in 3M (NYSE:MMM) -- my largest and, unfortunately, lowest-yielding position. Very soon, cash will make up about 40% of my portfolio. Emergency fund aside, that dough will stand ready for deployment.

The idea is to buy Johnson & Johnson (NYSE:JNJ), Kimberly Clark (NYSE:KMB), Pepsico (NYSE:PEP), Merck (NYSE:MRK), Enterprise Products Partners (EDP), Exxon Mobil (NYSE:XOM), AT&T (NYSE:T) and other great companies at attractive entry points. I also want to add to current holdings such as GlaxoSmithKline (NYSE:GSK), Altria (NYSE:MO), Realty Income (NYSE:O), Vodafone (NASDAQ:VOD), KO, MCD and KMR.

To do so intelligently, I need mucho dinero in anticipation of the next pullback. Waiting until we're in a market correction to divest some of my current holdings -- thereby selling them when they are worth less -- would defeat the purpose of seeking maximum value.

If I'm right, I will avoid being crushed by the bulldozer I see coming and then will get to sift through the rubble for treasures. Or to put it in more genteel terms: While overbought stocks and funds lose money in the next significant pullback, I will be safely in cash ... which I then will be able use to buy great companies at great prices.

OK, but what if I'm wrong and a correction isn't in the offing for months and months and months? Well, in that case, I fully realize I will miss out on some gains. Companies I want will get more expensive, and I will have sold off profitable mutual funds.

Still, even in that scenario, I won't lose any principal. And this accumulation-phase investor is all about investing for decades from now, not trading for a quick run-up in capital gains. Besides -- and I can't stress this enough for any shovel-carrying thieves who might be reading -- it's not as if my entire net worth is buried in the backyard. More than half of my portfolio is in stocks and funds and bonds.

Investors who squirreled away cash before the Great Recession and then started buying in 2009 were rewarded handsomely with wonderful companies at discount prices. Even just last fall, those with money got to enjoy a bargain-filled shopping spree.

Although my Dividend Growth portfolio moved quite well the first half of 2012, I mostly have been stuck in neutral lately. It's time to idle for a little while until I get the signal to really step on the gas.

Disclosure: I am long AZN, GD, GSK, KMR, KO, MCD, MMM, MO, O, VOD, WAG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I also might initiate long positions in any of the other companies mentioned in this article.