Investing is difficult.
But not investing – sitting with cash and not finding stocks worth buying – is more painful.
After all, to most of us, activity equals achievement.
The need to remain active at all times is what leads CEOs to make bad capital allocation decisions, especially during heady times. And that is what leads most investors – big or small – to buy overpriced stocks.
We all want to be in the thick of action – largely because we hate the feeling of missing out on the party.
But then, as Charlie Munger says…
It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.
What to Do When There’s Nothing to Buy?
This is one of the most common questions I am being asked these days.
“I am not finding value in the stock market anymore.” asked a reader. “What should I do now?”
“Accumulate cash,” I replied.
“But that’s tough!” he said.
“Why?” I asked.
“Because cash in bank is a wasted opportunity,” he replied. “And why should I hold cash when it is paying nothing while stocks can grow my money much faster?”
Over the years and after learning my lessons (from not holding cash) the hard way, I’ve found several reasons to ‘hold cash’ when I have nothing to buy. Here are the biggest two –
Accepting these reasons has made me fearless of holding/accumulating cash when I do not find (much) value in the stock market.
Of course, this is not with the intent to time the market – which is impossible. The intent is to avoid acting when I find no reasons to act.
As Seth Klarman writes in his wonderful paper titled The Painful Decision to Hold Cash, the idea is to….
…remain liquid, defy the steady drumbeat of performance pressures, and wait for the prices of at least some securities to drop. (One doesn’t need the entire market to become inexpensive to put significant money to work, just a limited number of securities.)
But then, as Klarman also writes…
Human beings are only endowed with so much patience, after all. Few are able to look past near-term returns, and today anything appears to offer better returns than cash.
Also, given their relative-performance-oriented, competitive nature, investors loathe the possibility of underperformance that comes from sitting on the sidelines; they find it better to be in the game (unless, of course, the market drops). Most significantly, they remain highly skewed toward the greed end (how much can you make?) and away from the fear end (how much can you lose?) of the spectrum of investor emotions. In short, investors remain the consummate yield gluttons, seeking high return without regard for the likelihood of actually achieving it or for the risk incurred in the process.
You see, investing doesn’t always mean “buying something”.
In fact, as Buffett says…
Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.
So you tell me – What do you do when there’s nothing to buy? Share in the Comments section below.
I put forward this question to my friend and fellow investor Neeraj Marathe, and here is what he had to say…
I think it’s wrong to simply take a blanket decision ‘not to buy anything’. Opportunities exist irrespective of the market conditions or the index level.
However, in times of exuberance, the decision to buy needs to be taken much more carefully. Human nature would, by default, make us exuberant too, hence, it makes sense to be all the more careful. Here is what I do in typical exuberant times:
What do you do, my dear friend?
http://www.safalniveshak.com/what-to-do-when-there-is-nothing-to-buy/
Created by Tan KW | Aug 25, 2024
Created by Tan KW | Aug 25, 2024
Created by Tan KW | Aug 25, 2024
Created by Tan KW | Aug 25, 2024
Created by Tan KW | Aug 25, 2024
Created by Tan KW | Aug 25, 2024
Created by Tan KW | Aug 25, 2024
Good sharing, I believe there are a lot "investor" have problem on holding on their cash...I might be one of them :-) however, I found a way out, put your cash to repay my housing loan. Another advantage of doing this, I can take out the cash when the cheap sale coming....cheers~~
2014-08-06 22:17
Good sharing. For me, I work harder and cast my net wider to look for good deals. Sgx and hkex looks more appealing to bursa now and I have to work hard to hunt for good bargains there.
2014-08-06 22:23
Take a look at cnmc goldmine, I anticipate an explosive q2 report. When klci is expensive, look elsewhere for bargains.
2014-08-06 22:27
khuen
We shall wait until BIG SALES reach, then we buy with all the cash accumulated.
2014-08-06 18:40