How Long will it take to get my cash fully invested and why?

At Century Management we consider a fully invested portfolio to be one that has 80% or more equity exposure. It is our goal to fully invest a portfolio as fast as we can prudently do so. The average time it takes to fully invest the typical portfolio is between 6 and 12 months.

In normal markets it may take between six (6) and nine (9) months to get a portfolio fully invested. Fully invested, as defined by Century Management, is somewhere above 80% invested in equities. Additionally, we acknowledge that there are times, due to fluctuating market conditions, that this investment process can be shorter than average, meaning less than three (3) months. Or it could take significantly longer than average, meaning more than twelve (12) months, to reach the Century Management definition of fully invested.

In practicing true investment and business principles, we adhere to our strict buying discipline. One of the key ingredients in creating superior investment performance while maintaining low risk is purchasing each investment at the right price. Once we have bought stocks at bargain prices, we have increased the possibility of making good returns. In other words, we want to put the odds in our favor.

This is not market timing. This is the execution of a well-disciplined investment philosophy. After all, how would a client benefit by investing in an over-priced company just because there was new money deposited into the account? Patience and discipline are the secrets to making money over the long run.

It is our goal for a portfolio to have 35 to 45 companies with the risk and reward odds in our favor. This means that we will require approximately $5 of upside for every $1 of risk before investing client's capital. If we cannot find enough companies to fully invest a portfolio with these risk and reward odds, then we will exercise patience and continue to search until we can find a company that fulfills our strict requirements. We can see by our historical performance that our execution and discipline have provided our clients above-average long-term returns while operating with less risk than that of the general market.

We do not look at cash or money market funds as an idle investment. If stocks are over-priced, cash is our investment of choice. Cash is opportunity money whose only requirement for a successful return is patience. The patience to wait in cash for a bargain investment opportunity will allow the investor to significantly out perform the market over the long run with lower risk. To demonstrate why buying at the right price is so important, let's say we believe the buyout value of a company is $20 and the stock is currently at $12. If we exercise patience and discipline and wait to buy the stock at $10 (50% off), then when the stock just gets back to $12 we have a 20% return. However, if you had bought it at $12, we would just be getting your money back.

For another example, by looking at the chart below you will see a company that we believe has an intrinsic or private market value of $36 per share, a sell point of $30, a buy point of $15 and what we perceive to be a worst-case scenario of $12. Granted, a worst-case scenario would be the possibility of zero if a company goes bankrupt. However, under normal circumstances, companies generally do not sell for less than 30% of their intrinsic or private market value. For purposes of this demonstration we will assume a worst-case scenario of $12.

To illustrate our point, assume that the client adds money to their account when the current price of the stock is trading at $17. Certainly there is upside from this point, $13 to the sell point of $30. However, there is also downside potential, $5, to the worst-case scenario of $12.

To see how this looks in percentage terms, look at the chart below beginning with the row that shows a purchase price of $17. We can see that the downside risk to the worst-case scenario is 30%. Notice two lines above what happens when we buy the same company at $15. The downside risk to the worst-case scenario is 20%. This is a difference of 50%! As we can see, by overpaying just $2 dollars in this example the investor would have increased their risk to the downside by 50% and would be stuck with a company that only has $2.6 of potential reward for every $1 of risk, not very good odds.

Our discipline of waiting patiently in cash for the opportunity to buy a bargain with 5:1 odds should allow us to out perform the general market and our competition with lower risk. As your money manager it is our job to put the odds in your favor. It is also important to remember, that while we are exercising our patience and discipline, putting the odds in your favor, you will be collecting money market interest on your cash while we wait. Cash is opportunity money!