There Are Many Things to Worry About, But Many Worry About the Wrong Things

I can remember last year several individuals voicing concerns regarding the "fiscal cliff" (a buzz phrase that has hopefully been excised from the vernacular) throughout November and December of last year. They were concerned that government spending would be curtailed and the stock market would suffer, therefore wouldn't it be prudent to raise a substantial amount of cash in portfolios?

My response then was that Congress would eventually do the right thing and that despite being incompetent and irrational most of the time, they weren't completely stupid. Furthermore, I felt then that there was no sign the economy would stop it's slow crawl forward. Thus, there was no reason to sell anything because of what our Congress may or may not do. In fact, I added more cash to my personal account to invest in under-priced securities during this time frame.

Looking back, it's easy to see holding on to or adding to your investments was the right course of action. Had you invested in just an index fund that tracks the S&P 500 on the last day of 2012, you would now be up about almost 18%. Had you raised a lot of cash due to a fear of something you can't control or accurately predict, there's no telling how far behind you might be. I think this is a cautionary tale of how most investors should not let things that are entirely out of their control affect their actions. Focusing on what is knowable and what is in your control—investigating, buying, and holding on to undervalued companies and waiting patiently for their inevitable price appreciation—should be the only thing about which an investor worries.

With that said, it is probably easier now to worry about whether the market has gotten too far ahead of itself. The likely question now is: "Isn't now a better time to start to raise cash than it was six months ago?" My answer is yes and no.

My answer is yes for those securities in portfolios that have reached or exceeded my estimates of fair value. I have already trimmed a few positions.

My answer would be no for a few different reasons. One, the majority of securities we own are still under-valued. There's little reason in my mind to try to time the market (and incur transaction costs) and sell in the hopes that something will go down in order to buy it again at a lower price.

A second reason I am not selling relates to the differences in taxable accounts and retirement accounts. I find it very difficult to sell something that has appreciated to fair value in 6 months in a taxable account when it is probably better to wait another 6 months or a year to sell at a better capital gains tax rate. If this fairly valued security was in a retirement account, I would be more likely to sell a portion of the holding.

The Market is Not a Proxy and the Federal Reserve Should not Dictate Investment Decisions

Given that it's impossible for average investors to focus on any one of the thousands of individual stocks out there, they tend to look at what the market has been doing, it's P/E multiple, and then extrapolate that across all stocks in the universe. This can generally be right in most cases, but there are always exceptions where this is absolutely wrong. There are always circumstances where individual companies or industries are mispriced, it's just a matter of putting the time and effort to look for them. Raising cash because "everything" is fairly valued or overvalued seems to me a bit lazy.

Also, some people in the past several years have let the Federal Reserve (and the potentially negative macro-economic ramifications of quantitative easing—i.e., high inflation) scare them into doing some not so intelligent things. This falls under the realm of things people can't control or accurately predict.

Worry About the Things You Can Control

I absolutely believe in the Stoic ethos that one should not worry about things not under our control, which is virtually nothing. The only thing we can control are our own actions and how we respond to events in life. From an investing perspective, this means we should not spend a lot of time worrying about the direction of the stock market, what Congress might do, or what the Federal Reserve might do. Instead, it is much more productive to focus on something that is within our control—the valuation of specific companies and buying or selling them at appropriate prices.

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