The Painful Decision To Hold CashMike
A true trait of a value investor seems to be that when you buy something, it drops in price.
Kidding aside, I asked this question to the folks on Facebook - and yes I still use Facebook.
While going through the comments, I'd say the people that answered average between 10-20% in cash. Not high considering that this is supposed to an "overvalued" market.
And from the looks of it, it doesn't seem to be based on the fear of missing out either.
Cash size is usually a result of not being able to find anything to buy for value investors, and that's the right approach. Rather than going to cash as a strategy and trying to time the market, it comes naturally for value investors as we do not like to overpay.
The other side of the equation is what to do with the cash. And that's where in times like this, when you can see uncertainty hitting the fan, I like to share one of my favorite articles.
Here's the PDF and a short summary for the time sensitive.
Choice Between Two Alternatives
- One is to hold stocks and bonds at the historically high prices that prevail in today’s markets, locking in what would traditionally have been sub-par returns.
- Remain liquid, defy the steady drumbeat of performance pressures, and wait for the prices of at least some securities to drop.
- Both have risks. With the first one, if the prices go down, then the investor losses significantly. The second one is no guarantee either if the stock also goes up then the investor still losses.
It's Painful to Hold Money for too Long
- There's no guarantee for both actions but one thing's for sure, many investors choose the first action.
- Because with the first one there is activity (there is something to do with the money--the act of investing it and not just sitting idle).
Those in the investment business compete on the basis of short-term, relative (not absolute) investment performance, and prefer to follow the herd (at the price of assured mediocrity) rather than stand apart (risking severe underperformance).
- Investors hate under-performance. They care about how much they can you make, than how much they can lose.
The Era of Higher Security Prices and Lower Returns
- Prices will fall at some point, but still, the opportunity cost is an uncertain amount - people on the sidelines for over 5 years have lost a very large sum of opportunities.
- Investors prefer risk of lost opportunity than that of lost capital.
- Some will say that holding on to cash is gambling, that being not fully invested is like timing the market.
- BUT investing doesn't mean ALWAYS buying something...
“Look for more value in terms of discounted future cash flow than you’re paying for. Move only when you have an advantage. It’s very basic. You have to understand the odds and have the discipline to bet only when the odds are in your favor.” - Charlie Munger
- Why should the immediate opportunity be the only one to be considered, when tomorrow's prospect could be more fertile?
Don't be surprised if you find me sending this article a few more times over the coming year(s).
Click here to download the complete PDF version
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Article by Jae Jun, Old School Value