As I watch the market’s relentless climb from overvaluation to absurdity I’m reminded of the words of one of America’s great philosophers, Tom Petty:

The waiting is the hardest part of investing

It’s HARD to do nothing. It’s HARD to sit on a pile of cash, trying to find reasonable valuations in this ridiculously overpriced market. I look at $10,000 and think, “if I invested that money today in something with a 3% dividend or yield I’d be making $300/year”. With $100,000 in cash you’re looking at $3,000/year in opportunity cost from not investing your money.

But whenever I start thinking about just doing something with my cash I think of the following quotes:

• “Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.” – Warren Buffett
• “Lethargy, bordering on sloth should remain the cornerstone of an investment style.” – Warren Buffett
• “Never mistake activity for achievement” – John Wooden (greatest college basketball coach of all time)

Here’s the reality – you make money by investing when stocks are either undervalued or available at fair value. For the vast majority of the market, that’s just not the case today.

What I like right now

I do see pockets of value in a few areas:

• Financials – I particularly like Wells Fargo (WFC) and Bank of America (BAC) today. Wells Fargo is still suffering the effects of the fake accounts scandal and is trading at a PE of just under 15. Bank of America has a PE of around 17. I wouldn’t say either of these is cheap today, but they appear to be more or less fairly valued. Financials are going to benefit from a return to higher interest rates – this increases their spread between what they charge for loans and what they pay for savings accounts, CDs, etc.
• Insurance – these will also benefit from higher interest rates over the next 5-10 years. Aflac (AFL) appears reasonably priced, possibly even cheap, at a PE of just over 11. Travelers (TRV) is interesting today at a PE of just under 12.
• Oil stocks seem reasonable cheap, especially if you believe that higher oil prices are in the future.  I’d stick to Exxon (XOM) and Chevron (CVX) as they are still making boatloads of cash even at today’s oil prices.
• Omega Healthcare Investors (OHI) remains really cheap. Everybody seems to be worried that changes to the healthcare system here in the US is going to bankrupt the skilled nursing homes that are OHI’s primary tenant base. I just don’t see it. And OHI is SO cheap  that the risks are more than baked into the price.

While I think the above options are reasonable places to deploy capital today I’m still choosing to split my money between building up a cash pile and paying down debt. After all, the time to leverage up is at the bottom of the market cycle, not the top, and I don’t think any reasonable person could argue that we are closer to the bottom than the top today.

 

 

Do you find that doing nothing is the hardest part of investing? What are you doing with your money today?