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Financial Freedom

‘Cash Is Trash:’ The Investment Industry’s Big Scam

“If you don’t see anything, you don’t trade… You take risk only when you see an opportunity”Paul Tudor Jones, in Bloomberg Markets magazine, June 2004You might not know the name Dan Ferris, but some of the shrewdest investors on The Street do…

Dan has quietly made a name for himself simply by doing investment research the old-fashioned way: through original thinking and very hard work.

For example, Dan took an interest in Hawaii-based conglomerate Alexander & Baldwin (Nasdaq: ALEX).

But Dan didn’t analyze the company in typical Wall Street fashion. Instead, he camped out in Hawaii’s government buildings, going through thousands of musty land records, to determine exactly what Hawaiian lands Alexander & Baldwin held.

You see, Dan had a hunch that the land values on ALEX’s balance sheet didn’t reflect reality, and he was determined to find out the truth. Dan discovered that ALEX has Hawaiian lands on its books going back to the 1800s. So Dan was right.

And that meant the “book value” of ALEX was nowhere near its real value. The book value in some cases may represent a 99% discount to current land prices in Hawaii. Dan discovered a great investment value through his hard work.

Dan reported his findings to subscribers of his newsletter, Extreme Value, and they’ve since made a handsome profit on ALEX.

What Dan’s Thinking Now

Dan and I had dinner last night. We’re longtime friends.

I have a great deal of respect for Dan. He is a good man thoughtful, caring and bright. He’s both analytical and compassionate, and he’s extremely well read. (He’s one heck of a guitar player, too.)

All of these things (with the exception of the guitar playing) help make him very good at what he does.

Our dinner was social. But of course, we talked about investing. A topic we kept coming back around to is that “cash is still the most hated asset class.” And most people today feel compelled to “put their money to work.”

This concerns both of us a great deal. We both know that whatever asset is the most hated asset is generally the asset you ought to be accumulating.

“Cash Is Trash”: A Truly Worthless Mantra

Mutual funds and financial planners prey on your need to “put your money to work.” Maybe it’s the lens I see the world through, but I see this everywhere.

Just yesterday, there was an editorial from the Chief Investment Officer of the Templeton funds group in the Financial Times. It really got under my skin

I have a great deal of respect for the Templeton group, as exceptional value investors in foreign stock markets in general, and in emerging markets in particular. But this editorial was a good reminder that the Templeton group, like all mutual fund companies, is in the business to sell funds. To make a profit. (Templeton in particular, as part of a publicly traded company, has an even stronger incentive.)

The editorial’s mission was to remind us to diversify globally. The article included profoundly bland quotes like: “It is time to adopt a global approach and invest wherever and whenever valuations are the most favorable.”

And: “A global approach broadens investors’ choices, which allows them to ride valuation waves between emerging and developed countries.”

You can try to “ride valuation waves.” But what you’ll find – and this is brutally true right now – is that if the U.S. stock market falls, markets will fall from Germany to Hong Kong. You can count on it – “riding valuation waves” or not.

Statistically speaking, the world’s stock markets are more correlated than they ever have been. In plain English, global diversification and a quarter won’t get you a cup of coffee in the near term.

I actually think Sir John Templeton, founder of the Templeton group (but no longer a part of fund management), would have been insulted by this article.

I would guess that if Sir John Templeton were at the reins right now, he never would have written that Templeton editorial in the Financial Times. He would have felt it to be disingenuous to promote this stuff at this moment.

If Sir John were to have written an editorial, chances are, he’d have said to get out of stocks. He might even say to sell some stocks short, as he famously did in 2000, and made a mint.

Consistent with Templeton’s basic theory, he would likely be looking for investments outside of the stock market. The reason? Today, there is barely a stock market in the world that constitutes “a real bargain” under Templeton’s principles.

In the Financial Times editorial, Sir John’s principles of value got corrupted into a bland “always buy international stocks” mantra.

In short, global stocks don’t add security to your portfolio right now. The Templeton guys, like everyone else in the industry, are out to sell products to you. But you don’t have to buy them right now

Some Straight Talk from Dan… And Me

In the mutual fund industry, the business only grows if the assets under management grow. In plain English, that means they want your money.

In my business, writing about investing, I don’t need you to invest more money. I have a great luxury – the ability to be totally truthful. And that’s why I’m telling you now -this is not a good time to be fully invested.

My interest is keeping you as a subscriber for the long run. My bargain with you is: If I give you good, profitable advice, you’ll keep reading.

The most successful investors in the world know there are times not to be fully invested. Paul Tudor Jones is one of the most successful investors of all time. In the June 2004 issue of Bloomberg Markets magazine, Paul summed up how Dan and I feel with uncanny accuracy:

“If you don’t see anything, you don’t trade You take risk only when you see an opportunity.”

Dan and I are looking hard for opportunities. We are finding a few opportunities for our readers, and fortunately in both of our cases they’ve been working out quite nicely. But we agree that money in the bank may continue to beat the overall stock market over the near term, just as it has beaten stocks over the last five years.

Nobody is forcing you to be fully invested. While cash is by far the least sexy investment class, there is a certain comfort in not having all of your assets exposed to stocks and real estate.

Don’t feel crazy for holding some money in the bank. Instead, sleep more comfortably at night. Cash will likely be safer and better diversification than international stocks in the near term. Remember, “If you don’t see anything, you don’t trade You take risk only when you see an opportunity.”

Good investing,

Steve

 


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