Money management

Money management to me is positioning your assets so they are poised to appreciate, but having enough liquidity to pounce when opportunities arise. You need bullets in your rifle to hunt your prey.

When markets rise and my asset values do accordingly, I get increasingly nervous. I am nervous by nature when it comes to finances, and I also have a bargain-shopping mentality. Perhaps that's why I don't mind it when markets drop--they represent buying opportunities. That's just my personality make-up.

The current rally in equities and commodities is a head fake to me, but strong enough to appreciate 40% so far from March lows, and irrational enough to extend another 20% potentially. So even though I believe this is a short-covering rally wrapped inside a secular bear market, I won't be shorting it--I won't get in the way and will let it run its course.

Instead, I pulled some profits off the table, leaving the majority in play for more profits--in case I am wrong on an impending correction. The higher the market goes, the more I'll pull off the table. Just like I will average in (buy) while the market tumbles, I will average out (sell) when it rises. I'll never be 100% invested, and I'll never be 0% invested. You don't want to get caught 100% long when the market tanks, but you don't want to completely miss a huge rally either. Meanwhile, I also am writing covered calls to generate income while I stay in the market. This will limit my upside if called away, but I'd still be up triple digits on my entry points and I keep the options premiums no matter what. Not bad. If the market corrects as I expect it to, I have some dry powder to go bottom-fishing.

In a raging bull market, your best returns result from being fully invested. But in a declining market, being 100% long leaves you no recourse but to sell into that declining market. Liquidity is king in those instances. So I will never be fully invested, no matter how bullish I am. And I am certainly not bullish today--at least not on equities.

Commodities--that's another story. With the dollar continuing to be flogged in the FOREX, the energy sector, metals, and soft commodities have all soared. This plays right into my thesis of the Fed reflating the economy with dollars in order to stave off another Great Depression. I think Bernanke will be successful by his criteria, but looking around the corner, this monetary explosion will result in inflation--the commodities markets are telling us that--all we have to do is listen to them. By the way, an exploding money supply is also why I believe equities may have more room to run north, but structurally, our economy is so broken I can't see a sustainable rally in equities.

I will stay mostly long my core inflation holdings: gold and silver mining shares, oil companies, natural gas drillers and pipelines, and commodities. The only equities I'm long on are specialized biotech companies which fluctuate somewhat independently of economic cycles, as they are pivotal event-driven, based on FDA approval. I use the qualifier "somewhat independently" because the financing environment is still very difficult, and markets have a low tolerance for risk. Unless the road to FDA approval is paved with certainty, microcap biotech companies have to be resourceful in order to fund their clinical trials. So far, the biotech companies I have invested in have shown promise, and some have even paid off financially already. A year from now, hopefully all of them will be in the green.

Until then, I stand firmly grounded in my thesis that paper money is becoming increasingly cheap, and owning hard assets will be the best hedge against debased currencies worldwide, including the US Dollar.