Cash Is King During Pullback

One thing I've come to regret during this pullback is not having enough cash on hand to buy.
Stocks went on sale, and my wallet was thin.
This was the first time I've experienced that.
I started buying stocks in 2008, and I waded in slowly through the next year as I researched and found companies I wanted to own.
Every time I funded my account, I already had something I wanted to buy.
With a bull market running through the next two years, I never saw the need to keep a lot of cash in my account. It seemed to always be better off invested.
Now, I'm paying the price.

I managed to sneak a question about cash reserves to the Motley Fool staff during one of the website's live chats this week.
MF writer Morgan Housel said he had the same dilemma when the market crashed in 2008. Stocks were cheap, and he didn't have enough money on hand to do much buying.
Since then, he's shot to build up a cash reserve he can employ when plunges happen.
He said he tries to keep somewhere in the area of 15 % of his overall portfolio in cash for times like these.

When I looked back at what I'd had on hand when the big hits started coming this summer, it was just shy of 5 %.
That went quickly. Too quick. Now, I'm like a kid at a candy counter with no change in his pockets. I've dug down, and pulled out lint and white pocket liners.
Sure, I can scare up a little more by pilfering my savings account. But I don't like to take much out of there. And frankly, it's a bad habit to run your savings too low in order to fund investments that can lose money this quickly.

Where did I go wrong on this one?
My big problem is that I'm always like a kid in the candy store with stocks. Give me a $1 and I'll buy a Mounds and an Almond Joy.
Give me two, and I'll buy both and a buck's worth of Swedish Fish.
I've basically bought stocks pronto every time I've set aside money to do so.
That leaves me with little cash in my brokerage account. It never occurred to me that there may be a better way because it never seemed to be a problem.
While I'm not entirely convinced there is, this plunge has me thinking about it.
Keeping cash on hand for price dips allows you to buy more at those lower levels.
I could have doubled down on a handful of stocks at at least 20 percent off my first buy.
But sometimes, you miss out on opportunities by not buying as you go along, too. Apple, for instance, was selling for $315 in June. Even after the recent price slaughter, it's pulled back to only $364.

Still, I'm willing to try this as an experiment over the coming years.
For now, I plan to funnel my money into stocks while I believe they are underpriced. But once the bull's gotten up and is off with a good head of steam, I'm going to look to build up that cash balance to at least 10 percent.

See my portfolio here.

Expect the unexpected

I had planned to start re-reading The Motley Fool Investment Guide Sunday, both to brush up on its lessons and to share some on the blog.
I tossed my paperback copy onto the passenger's seat of my Hyundai when I set out on some errands. I figured I'd stop and grab a park bench sometime, and enjoy the afternoon sunshine with my book for a while.
I never made it to that park bench.
Instead, I opted to park the car and venture out for a long bike ride.
Well, that was cut short by an unexpected thunderstorm. It struck about 45 minutes into my ride. The winds kicked up. The lightning grew closer by the minute.  And as I raced up the last mile toward my house, the sky opened. It was quite the downpour.
I made it safely home, with a soaked shirt, but none the worse for wear.
Relieved, I stepped inside my house and listened to the rain rumble on the roof for a bit.
Then I realized I'd left my sunroof open.
Wide open.
It was sunny, after all, when I set out. People were strolling around, walking dogs, sitting along the Susquehanna's grassy riverbanks, just minutes before the storm hit. 
I guess it wouldn't have hurt to take a look at the weather forecast.
Now, The Motley Fool Investment Guide sits on a shelf, swollen like a sponge as it dries out.
The re-read will have to wait.
There may be an investing and money-management lesson in here somewhere, though.
Expect the unexpected.
Even when the market is looking bright and sunny and calm, storm clouds might not be that far off, and they can roll in very quickly.
It never hurts to take extra precaution, to pause and weigh your risk before making that next investment decision.
Because a seemingly innocuous decision, if not well-thought out, may leave you more vulnerable than you first thought.

How do you know what to buy?

I admire investors who adhere to strict criteria for their investments. Value investors who set out parameters on price-to-book-value and price-to-earnings ratios and don't deviate. Growth investors who do the same with revenues and earnings.
I've never clung to any strict guidelines or any single methodology.
And unlike the manager of a "value" mutual fund, I don't think lay investors like you or I have to.
It seems most important to simply be opportunistic.
Some of the picks in my portfolio below came from Motley Fool's Stock Advisor newsletter. Teradata, my biggest gainer at 191 % to date, falls into this category. I'd never heard of the company until I read about in SA two years back.
Some I researched after reading an article in Money or Barron's, or even hearing Jim Cramer call "Buy! Buy! Buy!" Gilead turned up in a bullish article, and I just read another this weekend.
Others were found using stock screeners, looking for solid growth and earnings and a low price-to-earnings, then put through some further research.
National Presto, the maker of kitchen gadets, bullets and diapers, falls into that catergory.

Confidence is key
Sometimes, the stars line up. I liked Ford's turnaround story. And soon after I started watching the stock, it won the recomendations of both SA and Cramer.
Hasbro had risen to the top of my buy list when it showed up as an SA pick.
I like it when that happens. You should be confident when you buy a stock, and nothing instills it better than seeing people smarter than you thinking along the same lines.

Diversify your sources
Over my time investing on my own, I've found it crucial to keep myself exposed to a variety of sources. When people considering stock investing ask, I advise they do the same.

• Read financial publications.
• Frequent sites like the Motley Fool that offer insight and fun reading to make things easier. This should be fun as well as rewarding.
• Get yourself some knowledge on fundamentals. Stock Investing for Dummies is a great starter reference.
• Learn your way around stock screeners. Every financial website seems to have them now. They are a great tool that the web has put in the hands of every investor. 
• And yes, watch Jim Cramer. He may come off wacky, but there are lessons in his edu-tainment, as well as continual nagging reminders. Diversify. Research. Don't let pride get in your way of making money. They're all there, just tucked in between "Booyahs!"