There are times when the stock and bond markets just will not cooperate with our investment plans and goals. It is beginning to look like we are in or fast approaching one of those times. The equity market indexes are pushing all time highs and bond yields are pushing all time lows. Basic utility stocks are carrying price earnings ratios that I've never seen in 30+ years of investing. While this is great for existing bond and equity investments, the stock and bond markets are looking frothy. Under these conditions what is an investor to do to continue growing their excess cash and dividend payments?
There are a couple of Warren Buffett quotes that come to mind that I believe are applicable to our current investing environment. The quote below is one that speaks to being highly selective in making your investments.
"I call investing the greatest business in the world ... because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it."
The quote above is from 1974 and today, GM is selling for around $30 per share and US Steel about $21. It was certainly to Buffett's advantage to let those two pitches go by without taking a swing. Buffett's advice is even more applicable today with the markets getting frothy. My translation of Buffett's quote above is to be very selective in our current investing environment. If you are going to invest in equities at these levels, a full understanding of a company's business operations, cash flow, balance sheet, competition, and external risks is paramount. This type of due diligence takes a lot of work and time on the part of the investor. Some investors don't have the time available to devote to the necessary level of due diligence. What strategy should investors follow if they don't have the time to do the extensive due diligence necessary for selecting individual stocks? Another Buffett quote comes to mind that can provide us some guidance.
"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful"
My way of interpreting the quote above is to take a step back from investing when other investors are bidding equities up into a froth. The other side of this same quote suggests that investors should be ready to invest when other investors are running from the market and driving the prices of equities down. Today, we are definitely in the former situation of having high and increasing equity valuations. So, where should an investor put their idle cash while waiting for the market to offer better valuations?
To read the entire article click on this link Stash Your Cash.