For the past 18 months we know that Family Offices, Institutions, Foundations and some other very wealthy investors have been slowly selling into the stock market strength as small late to the party investors and mutual funds bought their shares. I have written about this MarketWatch. Barron’s has also written about this shift to cash and short-term treasuries by the very wealthy. I have told folks to have 25% to 50% in cash all year. Yet, small guys keep chasing and overextending.
For those who are overextended, I would look for ways to maintain your leverage to rebounds in any beaten up shares, but to also look for ways to keep small losses from becoming big. It’s a delicate operation.
It’s particularly tough to avoid losses when short sellers continue to pummel stocks that are already down. Right now those short sellers are having a disproportionate impact because the big money has been dribbling out and hasn’t started buying yet. Ultimately the big money will buy back in, I can tell you this as I’ve added some big money clients recently and that’s what they want me to do for them in the next year or two. They are particularly interested in my “very short list.”
So, until the big money started scooping up cheap assets, what should smaller investors do?
Well, understand that the short sellers are giving you some amazing opportunities. I like selling puts to earn premium and establish pseudo-limit orders.
We do have to remember to be patient. So far I have only become overextended on one stock, Chesapseake Energy, but it’s uncomfortable nonetheless. My comfort is that I know my analysis is right and that the calendar will make me money over time.
Take a look at my “very short list.” That basket of stocks, along with a couple less correlated ETFs might be all we need for a long time once established.