At any moment in time you can hold your wealth in three forms: consumption goods, investment goods or money. With money you can stay on the sidelines, you keep your purchasing power and stay ready to buy consumption and investment goods in the future.They key point here is that "cash" - and I'm using that term, in this context, interchangeably with "money", does have the special power of enabling you to stay on the sidelines, while all other investments may be struck by volatility, cash's purchasing power will remain constant (in the short term) to consumer goods, and independent of the volatility of the investment goods.
Thus it remains a key part of my investing strategy:
- Identify quality companies.
- If/when they become cheap, buy them.
- Hold cash in the mean time.
Cash, of course, could include any currency, but for me, it's primarily AUD for two reasons - a) it is the currency that I need to buy Australian shares, and 2) it's looking stronger at the moment that any of the other major currencies (USD, EUR, etc). I also now consider my relatively modest gold and even more modest silver holdings to be part of my "cash" holdings. Obviously, according to my investing strategy outline above, one day, I will use this cash to buy some quality companies.
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>> cash's purchasing power will remain constant
ReplyDelete>> (in the short term) to consumer goods,
How constant has cash's purchasing power been lately with the price of bananas? Or even with a loaf of bread in Brisbane earlier this year?
How constant has cash's purchasing power been with the price of real-estate (the most expensive purchase that most of us will ever make)? Over the last ten years, it's dropped its value by more than 50%.
>> [AUD is] looking stronger at the moment that
>> any of the other major currencies (USD, EUR, etc)
Doesn't that suggest that it's overpriced?
If BHPBilliton was 'looking stronger' than other major miners at the moment (eg Rio Tinto etc) wouldn't that be a good reason to sell?
.. just askin' .. :)
1. Cash's purchasing power remains constant to the basket of goods (in the short term). Of course if you want to pick individual items out of the basket, I'm sure you'll find a few outliers.
ReplyDelete2. By 'looking stronger', I mean 'has better medium term prospects', which suggest 'underpriced' rather than 'overpriced'. Although, with the AUD/USD currently down to 1.02, the market is disagreeing with me on that one.
Strawman arguments aside - if you'll pardon the pun - the real question here is, is there a better investing strategy that the one outlined above? And part b) Does removing the concept of cash help or hinder the exercise?
>> Of course if you want to pick individual items
ReplyDelete>> out of the basket, I'm sure you'll find a few
>> outliers.
My understanding (please correct me if I am wrong) is that house prices (and mortgage repayments) are left out of the consumer basket for computing CPI increases (I am avoiding the use of the word 'inflation' here). Leaving out the single most expensive item in the basket is cherry picking. I am not taking individual\
items out of the consumer basket, but Treasury is when they take out the family home.
And so is anyone else who uses this fictitious basket to justify the inherent stability of fiat money.
I accept what you say about 'medium term prospects' - it would be a brave man who holds US or EU currency at the moment.
I also accept that the strategy of buying into quality companies when the price is good, but holding cash is only one way to make this happen.
Basically your stategy seems to be:
STRATEGY1: 'move my wealth from cash into X when the (real long term) P/E for X is really good'.
Immediately you have a problem - ie how to define 'really good'.
Okay, let's consider another stategy:
STRATEGY2: 'move my wealth from where it currently is, to X when the P/E for X is much better than the P/E for what I am currently holding'.
This has the same problem as STATEGY1, but why is it an inherently worse stategy?
Now consider that avoids the 'how good is good?' problem:
STRATEGY3: 'always move my wealth into the form with the highest P/E' (minus the transaction costs, so you don't squander your time and wealth on E*TRADE brokerage fees).
Will this perform worse than STRATEGY2? You will probably say 'Yes, because you never pick up a bargain - you will never effectively double your P/E ratio, because you already own all the stock in X you can afford.'
But be wary - as soon as you make that claim, you are admitting that you are gambling on short-term price fluctuations - ie playing the day-trading game, which this strategy is supposed to avoid.
You can only make money by waiting for a hot-stock to go into gloom, and then buying it. Just because you don't have a 'sell' strategy doesn't mean you aren't playing the zero-sum-game of the day trader.
.. and now I really should do some work, and make some money instead of just dreaming what I will do with my fortune once I have made it ..
Great comment. I'll follow up with a full post..
ReplyDeleteBut in the mean time, on CPI, they are changing it again: http://www.theage.com.au/business/housing-costs-figure-larger-in-cpi-20110922-1kmvw.html
ReplyDeleteSo, currently it includes housing building costs and housing rental costs, but not mortgage repayments.
I think the original rationale of removing mortgage repayments was that it created a circular reference. That is, CPI was used to determine interest rates, which is a component of the CPI. Must have broken someone's spreadsheet.
See also here for a good discussion: http://www.macrobusiness.com.au/2011/09/cpi-change-confuses-markets/
Generally, governments want the ability to print money without any evidence. This inevitably leads to manipulation of the basket in ever increasing amounts. This is clearly evident in the US, where food and fuel are not present in the core inflation basket, and also given the large and increasing discrepancies between the official CPI numbers and those presented by http://www.shadowstats.com/
Main follow up here: http://delusionalinvesting.blogspot.com/2011/09/three-strawman-investing-strategies.html
ReplyDelete