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Sometimes, the best thing to do may be nothing at all.
One bit of Wall Street's conventional wisdom says investors should sell in May and go away. This year you could have sold in January without having missed a thing. In fact, the major market averages are at or below their levels at the end of 2003, leaving many investors frustrated.
Imagine how a value manager must feel. Not only has the market been virtually dead in the water, but just about stock and every asset class is either fairly valued or overpriced. What's a value-oriented professional to do when his clients are paying him to invest?
Whitney Tilson, founder of Tilson Capital partners and manager of the Tilson Growth Fund is a member of the Church of Graham and Dodd best exemplified by its most prominent preacher, Warren Buffett. Tilson says that this year has the toughest environment for a value investor that he's ever seen. Every asset class, every industry, every type of stock -- growth, value, small-cap, and large-cap -- all either trading at full value or are significant overvalued, Tilson says. Does he remain true to his standards in looking for real value, or compromise his standards and pay a bit more for something that only looks cheap relative to the rest of the market?
Tilson chooses to stick to his principles. "Once you start compromising those standards, you can lose a lot of money," he says.
It's not easy. Usually 100 percent invested in stocks, his largest portfolio position is cash - 35 percent of his portfolio! The rest of portfolio is invested in stocks that were bought when they were true values, deeply discounted to what calculations show to be their so-called fair price.
One of the hardest things to do as a professional money manager is sit on a lot of cash, Tilson says. There are enormous pressures to be fully invested, on of which is having clients question why they should pay a manager to do nothing.
Tilson responds that he's being paid to allocate investor's dollars in the best way he knows how. Investors pay him to put that cash to work and put it at risk in situations that are extremely favorable to his clients. If he can't find stocks that fit those criteria, he prefers to sit on cash and wait until the market serves up a nice, juicy pitch that he can hit out of the ballpark.
No juicy pitches in the market or on the horizon right now, Tilson says. Not only is he waiting for the "50-cent dollar" investment, he wants to be "trembling with greed" before he makes a move. The last stock that made him tremble was CKE Restaurants, currently his largest stock position. CKE is the parent of Carl's Jr., Hardee's La Salsa Fresh Mexican Grill and Green Burrito.
He does what he calls "scuttlebutt" research: Calling individual stores, talking to front line managers and visiting the operations to get a look for himself. Tilson still likes CKE even though it has more than doubled in price over the last 12 months.
Tilson also owns Office Depot and Berkshire Hathaway, almost a prerequisite holding for any true value investor. But he's not ready to buying anything else until stock prices fall.
The problem today is that every sector is in favor, so nothing is cheap. He likens the market to New England weather -- just wait a few minutes and it will change. He doesn't need the entire market to drop 50 percent to find bargains. He just needs a few sectors to have bad things happen to it and he'll put the cash he's holding back to work. But for now, cash is king.
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