| Weekly Roundup Hello, Reader. Halloween is just a few days away, so I have one question to ask… Trick… or treat? Trick: Stock valuations in the United States today are close to record highs, and highly valued stocks tend to produce poor returns. Treat: Cash can become a superpower when stock prices are falling. So, I recommend raising cash, here and there, when valuations are lofty as they are today. Now, I’m not suggesting a complete portfolio liquidation or anything like that. I am merely suggesting that you raise cash opportunistically by selling into strength or trimming positions… because the only way to have cash available when stocks prices are low is to raise cash when prices are high. Perhaps no investor’s career demonstrated the awe-inspiring power of cash – and patience – better than Jean-Marie Eveillard’s. During the late 1990s, Eveillard was running the SoGen International Fund (now called the First Eagle Global Fund). He had been a supremely successful investor with an enviable track record. But as stocks soared ever higher during the dot-com bubble of the late 1990s, the SoGen fund lagged far behind. From the beginning of 1997 to the end of 1999, the S&P 500 more than doubled while the SoGen fund advanced just 29%. A large allocation to cash and precious metals weighed down results. Some folks started to wonder if Eveillard had lost his touch. Many of his shareholders scorned his “excessive prudence” and started withdrawing from his fund. But Eveillard was resolute. While many investors were piling up cocktail-party tales of investment success, Eveillard was piling up cash. At the peak of the dot-com bubble, he defiantly remarked, “I’d rather lose half our shareholders than half our shareholders’ money.” And that’s exactly what happened: Disgruntled investors withdrew from his fund, and Eveillard lost half his shareholders. But when the tech bust finally, and inevitably, rolled around, he did not lose half his shareholders’ money. It wasn’t easy going for Eveillard at the time. For three long years, it looked like his illustrious career might end in disgrace. His fund nearly closed down. But as it turned out, Eveillard’s prudence was, in fact, prudent. In the 10 years from March 31, 2000, to March 31, 2010, the S&P 500 Index produced a negative total return. Over the same time frame, Eveillard’s SoGen International Fund more than tripled! 
Instead of spending a decade recovering from severe losses, Eveillard was able to pile up fresh gains. As his gutsy move demonstrates, cash is not just the starting point of an investment. It is an investment in its own right. To understand this concept, we must flip the typical view of investing on its head. Instead of looking at stocks as a certain quantity of dollars, let’s look at dollars as a certain quantity of stocks. If I have a $100 bill and I wish to buy a $5 stock we’ll call “Stock X,” that bill is worth 20 shares of Stock X (i.e., $100 divided by $5). If that stock then doubles to $10, $100 of cash loses half its value, stock-wise. It is now worth just 10 shares of that stock. And if Stock X were to soar all the way to $100, that $100 bill would be worth just one share. In other words, its value, measured in shares of Stock X, would have tumbled by 95% – from 20 shares’ worth to one share’s worth. But the opposite is also true – and that is the key message about cash. When stocks are falling in value, a $100 bill is gaining in value relative to stocks. For example, if Stock X falls from $100 a share to $50 a share, the value of a $100 bill doubles. So, cash isn’t simply an inert unit of measure. It is a unique asset whose value increases when the prices of other assets are falling. Nothing beats cash. It is the one and only vaccine against capital loss. Like vaccines, it provides no visible therapeutic benefit. It simply repels harm and preserves your financial health. Cash enables your portfolio to nourish itself on great investment opportunities, whenever they present themselves. Now, let’s look at what we covered here at Smart Money this past week… | 
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