Wrestling With The All-In Investment Decision

There will come a time when you are looking at your portfolio and you think to yourself that you really need to give it some kind of Red Bull induced supercharge to get it closer to your long term goals faster. There are many reasons for this and are not limited to the following:

  1. You see the market roaring along as it has the past few years and feel you have been left behind and need to catch up or keep up with the stock market “Jones”.
  2. You are generating decent returns but at the current rate it will take many lifetimes before your portfolio will reach the level that will meet your financial goals.
  3. You have been losing money and need to play catch–up or get the portfolio back to break–even.
  4. You want to show off to your friends and buddies how you caught that big fish that will vault you into long term financial bliss.
  5. You are just down right greedy and want to max out everything.

Chances are at least one of these thoughts has slipped through your mind (it has for me). Usually the response to these thoughts is to make a big bet on some stock or investment that will hopefully pull a Netscape and will explode overnight by a thousand million percent.

You will get a lot of people talking about the importance of diversification and spreading your savings into different asset types (stocks, bonds, art, real estate etc). They are right. Putting your savings into one specific investment product can be a very risky proposition, especially if that decision is driven by emotion or a desire to “catch-up”. At the same time, going all–in or dedicating a large portion of your portfolio to a specific stock or asset can be appropriate if the emotion is taken out of the equation by doing proper due diligence. Below are some circumstances where going all–in can play to your advantage.

Trusting Your Process
Whether it is done on your own or with an Investment Coach or with a Financial Adviser, you need to have a roadmap, a game plan, an investment ideology and strategy that you believe in 100 percent. Your methodology for how to make investment decisions is something that is entrenched within you and you have no problem staying disciplined to maintaining that strategy. You have to have unconditional confidence in how you make your investment decisions. At various points in time, your process will unearth opportunities where the stars are aligned according to your process and when it does, you should consider putting more money to work on that investment. In order to make that leap and decide to go all–in you MUST have the discipline to ride it through because at some point there will be rough spots. During those rough spots, if the fundamental analysis of the investment has not changed materially, there is nothing wrong with holding on or even adding to your position.

Having a Cool Off Period and Implement a Purchase Program
Going all–in or taking a large position in a stock does not mean immediately after you have determined that you want to buy a stock that you log on to your brokerage account and make one big trade for 10,000 shares. Take a breath. Sleep on it. Digest the decision. When you buy a house which is also a significant investment decision, there is a legal cooling off period to allow you to evaluate the deal. Buying and selling stocks should be no different. Chances are the stock will still be in the same price range the next day. If you still feel good about your decision, then the next thing to do is to put together a purchase program. You do not want to go out and buy 10,000 shares right away. Establish a timeline of your purchase. Instead of buying 10,000 shares in one day, buy 2,000 shares and then build a schedule to slowly build up the position. Buy 2,000 shares today and 2 weeks from now buy another 2,000 shares and then a month after that buy another 2,000 shares and so on. The point of this is to ease into the purchase over a longer period because it will allow you to dollar cost average your purchase price in case the stock price falls further. It also gives you an opportunity re–evaluate the business in case the fundamentals have changed and suddenly your analysis deems the stock to be not as rock solid as you thought. If so then you can back out of the investment with a more manageable loss.

My Personal “All–In Moment” in Real Time
Historically I have kept my purchases fairly conservative. I have tried to keep them within a threshold that I am comfortable with and have tried to not have one investment dominate the portfolio. There are times thought when I have come across opportunities where after crunching numbers and looking at other qualitative factors, I decided to build to buy more stock than I normally do. I have never made an all–in investment but I have taken large positions. I am currently facing such an investment decision.

In the last year I have been taking a short position on the S&P 500 index. In a nutshell I believe the index which is at all-time highs is due for a major correction. I usually do not short stocks or indexes. I believe in making investment decisions that are predicated on wealth being create not destroyed. The only time I have shorted stocks is when I observe that there has been an extreme position or consensus taken by a variety of stock market investors. I feel such an extreme position has evolved over the last 12–18 months.

I have felt that the actions by Central Banks around the world to print money to keep interest rates artificially low to induce more investment by companies has crowded investors into buying stocks and has distorted the value of companies. As the market has roared along, economic fundamentals have been meagre to modest at best, making it difficult to justify stock prices at their current levels. Retail investors are entering the market in full–force (almost an all-in moment in itself) and are doing so by taking on record levels of debt. Many stock market indicators are showing extreme bullishness. Companies are choosing to use their inflated stock as currency and overpay for businesses instead of investing in developing their own products and people. The sentiment is that stocks will keep going up, basic economic fundamentals be damned. When I see that level of extreme sentiment either good or bad, I tell myself that it is not sustainable and I should take the other side of that position. Right now I am feeling that we are in a very extreme overbought position and the more it continues the more it will explode in a bad way. On the other hand there is a saying that you “don’t fight the Fed”. You should always go along with what the Fed is doing even if you do not agree with the logic. A lot of that has been happening and despite my outlook I still have been buying stocks, just not as aggressively. My mindset though right now is I feel at some point and I don’t know when that reality will set in, the game of musical chairs will stop and many investors will get caught. I do not think stock prices can go up in perpetuity like they have. The similarities in sentiment and behaviour between now and the late 1990’s are palpable. So I decided to put my money where my mouth is and use an ETF that shorts the S&P 500 index.

I opened a modest position in January 2013 purchasing the Horizon Beta Short S&P 500 ETF and since then I have periodically added to the position. I added to it on November 2013 as well as this year in January, March and May. Right now the position represents 27 percent of my portfolio and 61 percent of my equity position. The average cost of the position has fallen from $5.70/share to $3.62/share. Since I have opened the position I am currently as of this writing down 11.8 percent. Should the current market conditions prevail, I am planning to increase the short position on a periodic basis.

When Going All–In: Be Prepared For Bumps In The Road
When you take a contrary position and put a lot money behind it, you have to be prepared to tolerate a lot of volatility as there are a lot of people who thing you are wrong even though you believe you have done enough analysis that shows otherwise. You also have to be prepared for the reality that despite your hard work, you can be wrong. For myself, taking this short position in the S&P500 has so far been a very difficult investment especially as the market soars to record highs sometimes on a daily basis, I have questioned on numerous occasions whether I should continue holding it and every time I examine the situation, I just can’t get past tepid fundamentals I have discussed above. I keep telling myself that the current environment is not sustainable. Stocks cannot just keep going up in perpetuity. Right now I look like the fool. I also take comfort that I know I have a cap on the amount I am comfortable to lose so even if as I take this aggressive position, I know that I will not be losing all of my investment on it as I have maintained a discipline to control any losses. We’ll see how far I can go with this.

There is nothing wrong with taking an aggressive position when buying a stock. The key thing is don’t do it on emotion and on a fear that will not be able to catch up. You take aggressive positions when your assessment of the opportunity results in a greater likelihood of success. They say you have to spend money to make money. Investing is no different.