Why I'm now fully invested

If you've been following my investing style (and there's no particular reason why you would), you'll know that I like holding a lot of cash. In my personal portfolio, I prefer to maintain a great deal of flexibility to take advantage of new opportunities. As holding cash is my default position, a new stock has to jump through a number of hoops before I press the 'buy' button.

Over the past few months, all that's changed. Both my self-managed superannuation fund and my investment company now have less than 10% cash. A cash weighting this low is virtually unheard of for me (although if new opportunities present themselves, I may begin to use prudent borrowings, as described in My financial affairs).

The reason is simple – I've been buying stocks. Out-of-favour blue chips such as QBE Insurance and Macquarie Group, in particular, have been the destinations for my cash recently. These have entered my personal portfolio alongside other still-underpriced blue chips such as Aristocrat Leisure, Platinum Asset Management and Harvey Norman.

Many of these stocks, I believe, have the potential to double over the next five years (being less underpriced, Platinum and Harvey Norman are probably exceptions). While I'm waiting, I expect most of them to pay decent dividends.

Burst of enthusiasm

So what has caused my uncharacteristic burst of enthusiasm for stocks over cash?

Simple. I agree with Bill Miller of Legg Mason; a 'once in a lifetime opportunity' to buy some great businesses now exists. True, Australian stocks are probably not as cheap as their American counterparts (which Miller is referring to) and we have fewer world-class businesses anyway.

But I've always been of the view that pessimism doesn't pay (if you've read this article, sorry to keep harping on about it). If you're not buying stocks when the outlook is bleak, then when are you going to buy them?

To me, programs like the ABC's recent Four Corners program titled Overdose (I'm yet to watch this, but will on iView this week) plus talk of The Great Depression Ahead (a book members keep mentioning) is evidence that the market mood is downbeat.

Cautionary notes

Plenty of intelligent people are sounding cautionary notes – and quite rightly. Platinum, an investment manager I respect, has moved to more defensive positions within its funds recently. The Intelligent Investor's research director Greg Hoffman has talked of the risks of deflation and the New Normal. There are good reasons to think it will be years before the world economy can lift itself out of the mess it is in. I'm very aware of these issues.

I'm also somewhat uncomfortable. It's almost impossible to avoid being infected by the downbeat mood when the Global Financial Crisis is fresh in the mind, and there are constant reminders about the world's debt problems. The value of my portfolio has also been drifting lower. But I've actually learnt to value this discomfort – it's an indication that stocks are probably cheap.

As human beings we're very much focused on the here and now, as well as the recent past. But, with the exception of a few difficult periods in history, it has paid to take a five- or ten-year view. In other words, I'm confident that most good businesses will be more profitable five years down the track.

I'm sure many investors are holding back waiting for the clouds to lift. But by the time the horizon is clear, stocks will be 30% higher. My experience has been that the value of my portfolio moves sideways for long periods, or drifts down, then all the performance comes in a rush. If you're not already invested, you'll miss the recovery.

Attractive yields

Perhaps most surprising was the 2010 company reporting season. The All Ordinaries index was predicting it to be poor, having fallen about 10% since mid-April. But, at least for most of the companies I cover, cash flows were strong and dividends were higher than expected. Yields are attractive.

Many companies, then, are telling us that they are in good shape, even if the outlook is uncertain. This is what I prefer to focus on; actual company results speak louder than all-pervading gloom.

So, in my view, the current negativity needs to be put into perspective. If financial Armageddon looms, my optimism is going to prove very costly. But, in most other situations, I expect the value of my portfolio to look much healthier five years hence.

What do you think? Am I being too optimistic? How are you positioning your portfolio at the moment?

Note: The stocks mentioned in this article are personal holdings and may not be suitable for you.