Thought of the Week

1. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion of our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser.
Thought for the Week (286):
Why So Much Cash?
Synopsis
 The DIAS portfolios have recently increased their cash allocations due to the selling of specific stocks in the portfolios.
 The ability to “go anywhere” is one of our most powerful weapons in this war against seniors and savers because we can alter the asset allocation in any way we see fit to profit and/or protect.
 Although this move to cash may appear to be a bearish indicator, nothing could be further from the truth. Rather, we are being opportunistic and waiting for quality stocks to go on sale.
Cash Balances Spiked
The S&P 500 has seen a volatile start to the New Year, and it seems like every market pundit in the media keeps pointing to an impeding correction after the meteoric rise in equities in 2013.
Furthermore, the allocation to cash in Global Financial’s DIAS portfolios has increased materially over the last three weeks, and the table below shows just how large some of these cash balances have grown.
DIAS Asset Allocation as of 1/31/2014
Given such a dramatic shift in the asset allocation, investors may be wondering if we have either turned bearish on equities or perhaps foresee another recession looming over the horizon.
The short answer is that nothing could be further from the truth, and we remain bullish on equities in the long-run. However, let’s spend some time explaining the reasons for this tactical move to cash and what the Investment Committee hopes to accomplish from a strategic perspective.

2. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion of our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser.
Cash is King
The DIAS portfolios, in particular Conservative Income (CI), are managed in a conservative manner. Our primary objective is capital preservation over the long-run, and we often make material changes to the asset allocation for the following reasons:
 Adapt to Markets: Global markets are constantly changing, and the flexibility of the DIAS framework allows us to search for profit unconstrained. For example, CI contained no equity exposure in 2010, and today it represents over 50% of the portfolio.
 Sell Winners: Since we do not have the risk appetite for expensive stocks in our conservative portfolios, we often take profits in stocks with rich valuations despite the future prospects for the underlying company. Redeploying this cash may take weeks or even months because we are extremely patient investors and prefer to wait for opportunity to arise.
 Play Defense: If we feel that we are moving into a downturn in an economic cycle, we will move to cash and other defensive assets to shield against outsized losses.
Our ability to “go anywhere” in an attempt to seek profit and avoid losses is one of the most vital components of the DIAS framework. For example, during the financial crisis in 2008, the S&P 500 lost approximately 37%, and CI was slightly positive for the year because we avoided equities.
NOTE: Most institutional investors (pension funds, endowments, etc.) prefer to use relative returns to a benchmark. For example, they would likely be very pleased with a manager benchmarked against the S&P 500 who only lost 34% in 2008. How would you feel if you lost 34% in a year?
The tradeoff of our conservative nature is that we will likely not capture all of the upside during years like 2013. Since CI carries far less risk than the S&P 500, the return should be expected to be lower during banner years for equities.
Simply put, moving to cash is not always a bearish sign, and we often make such tactical moves in order to lock in gains and patiently await for new opportunities to profit from the fear and panic of others.
Why the Move to Cash Now?
Our high allocation to equities in CI, relative to history, forces us to keep a strict focus on the valuations of stocks in the portfolio. Given the importance of valuation, let’s first explain how we value stocks.
Stocks are often referred to as “cheap” or “expensive” based on their price-to-earnings multiple (P/E), the de-facto measure of demand for a stock. However, there is much more to the story than just a stock’s P/E because stocks that look cheap are often cheap for a reason. Perhaps the underlying company is performing badly or technology is making them obsolete. On the flip side, a stock that may appear expensive due to a high P/E could represent a company in the early stages of explosive growth.
Simply put, the growth must justify the multiple. If a company has high growth prospects, then a high multiple is justified. If there is little to no growth prospects, then a lower multiple is justified. Therefore, we prefer to think of valuation in the context of one of the following:
 Undervalued: Stocks can have depressed multiples but offer stronger future earnings from a new product release or merger. For example, imagine finding an Armani suit hidden in a cluttered rack at a discount retailer for 75% off retail price.
 Fairly Valued: Stocks that seem priced right given the expected earnings. An investor is not getting an amazing deal, but he/she is not getting ripped off either.

3. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion of our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser.
 Overvalued: Stocks can have high multiples with little prospects for earnings growth. For example, a Honda Civic priced higher than a Ferrari would certainly be suspect.
We pay close attention to the relationship between price and value. When stocks go from undervalued to overvalued, we typically sell to lock in profits and lower overall risk in the portfolio.
One of the byproducts of the rise in equities last year is that many stocks appeared overvalued coming into 2014. For example, the consumer staples sector was trading at a near historic high P/E for next to no expected earnings growth this year.
Therefore, we have been selling many of the stocks that appear to be overvalued, or trending in that direction, because we believe that the upside vs. downside potential for these stocks no longer represent attractive investments.
Rather than redeploy the cash immediately into investments that appear to be fairly valued simply to keep the cash at work, we prefer to wait for undervalued stocks to emerge. Simply put, we are being patient and opportunistic.
Implications for Investors
The media appears to be fixated on the idea of a correction in equity markets, and perhaps the recent selling is the beginning of one. The setup for a correction looks ripe for a few reasons:
 There has not been a real correction in over two years, and they typically occur more frequently.
 Many stocks began the year relatively overvalued, and valuation can often spark a correction.
 Although tough to quantify, it feels as if investors are looking for reasons to sell and lock in profits from 2013.
Corrections are a healthy component to equity markets because they usually target stocks that are overvalued. It’s too early to tell if we are in a real correction, defined as a 10-15% move downward, but if we do ultimately see one then we will be ready to put this cash to work.
The bottom line is that there’s always the possibility that our performance may suffer due to such a high cash balance come year-end. However, we would much rather give up some negligible performance on the upside in order to prevent too much exposure to the downside by owning expensive stocks.
Although we remain very bullish on equities over the next 7 – 10 years, we do not take outsized risks in our conservative portfolios, and tactical moves like these are used to profit from healthy corrections in equity markets.