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When Large Institutions Hoard Cash, Start Investing

This article was written by in Investing. 8 comments.


Rather than lending and investing, banks are holding onto large amounts of cash. For large companies, particularly companies whose stocks trade publicly, now is a good time to keep cash on hand for excess liquidity and to look strong for investors and analysts. The liquidity allows the bank to be ready to strike when they believe it’s time to invest their own assets. And they will invest, it’s only a matter of time.

Even though I usually stay away from predicting shorter-term stock market performance, I can safely say that when large financial institutions begin lending and investing en masse, the stock market will go up. So now, before the banks make their moves, it might be a good time to move some of your excess cash into equities. The economic environment right now, in the midst of a recession, might eventually prove to be a once-in-a-generation opportunity for investing once we are far enough away to view the longer-term trends and place day-to-day experiences in perspective.

Published or updated April 28, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 8 comments… read them below or add one }

avatar deviantM

If you’re looking to put your money to work in this environment, you’re going to be stomaching a lot of volatility in the process. Knowing the details of the company’s balance sheet and cash hoard provides you with just that much more conviction about the quality of its business and financial standing.

You’ll need this conviction when the company’s share price takes you for a roller coaster ride.

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avatar Erica Douglass

Ooh, I really don’t like this call here. The technical indicators are showing overbought: http://globaleconomicanalysis.blogspot.com/2009/04/technical-indicators-scream-caution.html

Also, we’re now above the 50% line of where the market peaked. Statistically speaking, in a downturn, it’s only profitable long-term to buy index funds when the stock market is at 50% or lower of its peak. The DJIA peaked at just over 14,000; it’s at just over 8,000 right now, which means you could see a substantial loss by investing now.

I’d wait until the DJIA gets to around 6700-7000 or lower before investing again. In fact, I am doing that with my latest IRA contribution.

-Erica

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avatar Joe Light

As you mentioned, predicting short-term stock market performance is nearly impossible. There are just too many irrational forces that cause short-term swings competing with the rational forces that should determine whether or not companies are a good value at current prices.

A couple months ago, I wrote a story talking about how the market had finally reached a valuation (based solely on normalized price to earnings ratios, which I know isn’t perfect) where it made sense to buy stocks. I’m not sure how that same analysis would work now, given that the stock market has risen 25% or whatever from its bottom.

The main problem I have with technical indicators, like those mentioned in Erica’s link, is that they try to somehow quantify those irrational forces to make a short-term market prediction. At least from the descriptions I see in the link, it looks like none of them care about how much companies in the market actually make (which, as with any business, should be the driving force of their value in the long term).

I also don’t understand the assertion that you can only make money in the long term buying index funds when the market is 50% or more below its peak. Maybe you’re referring to some sort of study that I haven’t seen, but the market (including dividends) has grown by large multiples in value over the last hundred years. Again, this is an arbitrary measure that is completely disjointed from the entire reason WHY you buy companies…because they make money and pay the income to you! If earnings tend to increase over time, you’ll make more money. If earnings tend to decrease, you’ll lose money. Now, you could argue that the fact that companies pay little or no dividends nowadays is a problem, but that’s another discussion.

Anyway, I discourage active investing (i.e. making calls like this) for most people, but if you’re going to invest actively, at least look at things like income, cash flow, assets, etc. rather than make calls based purely on moving stock prices.

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avatar Erica Douglass

Hi Joe,

Here are more details about the 50% line I quoted: http://accessrisk.knowledgeatwharton.com/index.cfm?fa=viewArticle&ID=2188

I only invest in dividend-paying stocks, and I carefully research every stock I invest in, so I’m with you on that one.

I’m just not hugely comfortable investing right now, especially since so many think the market is overbought. Doesn’t mean there aren’t still good buys out there, but I’m happy to wait.

-Erica

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avatar Andrew

“Statistically speaking, in a downturn, it’s only profitable long-term to buy index funds when the stock market is at 50% or lower of its peak.”

I don’t think you interpreted his comments correctly. He made a very generic statement that once stocks have lost 50% of their value, it’s very unlikely to LOSE money in the long run. He didn’t say you couldn’t make a profit at higher valuations. You won’t make as much profit, but there is still profit that can be made now.

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avatar Troy

The reason banks are “hoarding” cash isn’t because they are waiting to pounce.

It is because they have to shore up their reserves. And this excess cash is from mostly from government assistance.

Thinking that banks are readying themselves for opportunities is foolish in my opinion. They are desparately trying to stay alive, and unfortunately many of them will not make it. Regardless of their size. Most major banks are technically insolvent. You think WaMu and Wachovia failing was bad…just wait.

This “hoarding” and “preparing” idea is dangerous. Dangerous to think you can time this market. The worst is yet to come. It is virtually guaranteed. At some point in time it will be wise to invest in equities, but now it is not investing.It is gambling. My guess is we have a couple years before the excesses are flushed out.

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avatar Luke Landes ♦127,365 (Platinum)

It could well be that the worst is yet to come, but unless you have to sell at the bottom, that shouldn’t matter much. Anytime the rest of the world is scared to invest in equities it’s a good time to start (cautiously, not recklessly, index investing, not stock picking) if you’re keeping your eye on the future, at least according to Warren Buffet. That’s the only kind of “timing” that makes any kind of sense. You might experience some of the downside, but if you wait for the major, more conservative investors to move first, you’ll miss the best parts of the upside. It’s psychological — during the downturns, the average investor becomes overly cautious while during “exuberance,” the average investor becomes overly optimistic. It’s hard to fight those urges.

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avatar James Fowlkes

Careful in here, we are big-time overbought and the long term trend is still down, declining 200-day moving average and still trading below the 200-day moving average. Buyer beware at these levels.

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