We're sitting on more cash than at any time this year. Here's why
In investing, as in life, you cannot forget to eat your vegetables. It’s an essential part of living a long, healthy life. The analogue here is cash management, which is perhaps one of the least exciting, yet most important aspects of long-term, long-only investing.The main course is finding new names to invest in, or doing the homework to learn about one of your existing portfolio company’s buzzy ventures. Cash management is the steamed broccoli. But it cannot be ignored because it’s ultimately all about controlling your risk. That takes on heightened importance in this moment, when the engine of the bull market (the AI trade) is sputtering, and the prolonged Iran war is keeping oil prices elevated, potentially driving the Federal Reserve to raise interest rates to stamp out sticky inflation. We’ve lifted our cash level to the highest it’s been this year against that touch backdrop. And we believe we’re still at appropriate market levels for members to boost their own cash positions, without advocating for across-the-board selling. Diversification is one leg of the risk management stool, offering a hedge against market rotations that occur when certain sectors, industries, or themes fall out of favor. Cash, on the other hand, is what protects against broad-based declines. Compared to a long/short strategy, where short positions net out the exposure to long positions, the only way to reduce exposure in a long-only style portfolio like the one we run for the CNBC Investing Club is to raise cash. As Jim Cramer called out on Tuesday’s Morning Meeting, it’s easy to “woulda, shoulda, coulda” in a market like this, wishing you sold earlier. However, it’s clear AI infrastructure stocks are now rowing in rough waters — and for that reason, we aren’t looking to put cash to work in that area of the market. This is a game that rewards those with short-term memory, able to learn from past mistakes. Case in point: our exit of data center supplier Corning earlier Tuesday. Do we wish we had exited when the stock shot up over $200 in June? Of course, though we did trim on multiple occasions, including on June 30 (the day Corning set an all-time intraday high at almost $272; our sale was about $10 below that). Nevertheless, “woulda, shoulda, coulda” does nothing for us going forward. Taking action and reducing our exposure, by contrast, actually does something for us. It’s rooted in our belief that, regardless of where Corning shares are coming from, regaining upside momentum will be extremely difficult in the near-term. We’re in a seasonally weak period for the market. With earnings season wrapping up, the broader market action will increasingly be driven by Iran war headlines, the subsequent move in energy prices, and the resulting impact on consumer inflation — all feeding into what the Fed will do with interest rates. Those headwinds have been with us, but additional problematic layers have been introduced. In the coming months, we also have to contend with the run-up to midterm elections and the growing backlash toward data center construction. While the chorus of opposition has grown louder in recent weeks, expect decibel levels to keep moving higher as the campaign trail heats up. It’s clear the AI buildout is a key issue for voters as these massive data centers compete for resources — everything from energy to blue-collar labor and manufacturing capacity for memory chips, which is putting upward pressure on prices for smartphones, laptops and gaming consoles. There is a silver lining: the S & P 500 is within about 2 percentage points of all-time highs. This means there’s still time to conduct a portfolio review and think through the right level of cash to maintain. We’ve lifted ours considerably. In the month of August, our cash increased by roughly $100,00, factoring in our mix of sales and purchases. The exit of Corning added almost $57,000. If you’ve not followed along in our cash-raising efforts, we don’t think it’s too late. Keep in mind: Our cash position at the end of February was partially inflated by sales we made to prepare for our annual charity distribution in March. By the same token, our cash level at the end of March was partially depressed by executing on that distribution. To be sure, we certainly aren’t arguing for across-the-board selling. Indeed, despite the seasonally difficult period in which we find ourselves, we are looking for attractive opportunities outside of the AI infrastructure complex — in other words, staying committed to diversification as another means to manage risk. Any purchase, though, should be done in smaller sizes, not aggressively. While buying fear and selling greed is a classic investing strategy, we’re not quite there yet. The market’s fear gauge, the volatility index known as the VIX, is at very benign levels under 16, while the S & P 500 is within spitting distance of its highs. This suggests the market can get much more fearful than it currently is. Now consider that there’s still about two months until the midterm elections, with a growing possibility of a rate hike in the interim. This is the setup that informs our view to keep higher-than-usual cash on hand. Clearly, we’ve become increasingly cautious, even as we continue to see opportunities. It’s simply a matter of balancing the near-term headwinds with our longer-term convictions as we think about when to get money to work, and where. We’ll leave you with one more chart below, which maps our cash levels versus the S & P 500. As you can see, we put cash to work when the market took a hit, and sought to systematically increase cash levels as the market bottomed, fear dissipated, and the market rebounded. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
