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The Painful Decision to Hold Cash - safalniveshak

Tan KW
Publish date: Fri, 20 Mar 2015, 03:05 PM
Tan KW
0 501,549
Good.

 

Posted on March 20, 2015 

 

One of the many investing mistakes I made during the early part of my investing career was to be rash with cash.

One salary hike, one bonus, or one big inflow of money (family gifts etc.) and I would invest the same into stocks I liked, irrespective of what the stock markets were doing.

Cash in bank was considered a wasted opportunity and every chance to “let-me-buy-stocks-now” was grabbed upon.

The question I used to ask myself was – “Why should I hold cash when it is paying nothing while stocks can grow my money much faster?”

However, over the years and after learning my lessons (from not holding cash) the hard way, I’ve found several reasons to ‘hold cash’.

Here are the biggest three of them:

  1. When my cash is paying nothing and my stocks are losing, “nothing” beats losing.
  2. If I don’t have cash, it is almost impossible for me to take advantage of opportunities that may present themselves in the future.
  3. Holding ‘emergency’ cash for a short-term need or even a short-term potential need is always a good idea (I realized this when, during a medical emergency in 2008, I had to ask for cash from my family since all my cash was fully invested in the markets that were going down).

Accepting these reasons has made me fearless of holding extra cash.

Some cash in the bank (or liquid funds) helps me with emergencies, with keeping things together during difficult or changing times, or even with taking advantage of great opportunities.

But this is easier said than done. Holding cash, and not earning anything on it, is often a painful decision.

In a letter written in 2004, the legendary Seth Klarman wrote about this painful decision of holding cash most investors face. He wrote…

Investors must choose 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. If prices never drop, causing returns to revert to more normal levels, this will have been the right decision. However, if prices decline, raising prospective returns on securities, investors will experience potentially substantial mark to market losses, thereby faring considerably worse than if they had been more patient.

The alternative to remain in cash is truly painful. As Klarman writes…

The alternative 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.) This path also involves risk in that there is no certainty whether or when this will occur; indeed, securities prices could rise further from today’s lofty levels, making the decision to hold cash even more painful.

And because it is painful, and often requires tremendous patience, most investors – large and small – will choose to remain 100% invested, and also invest any new cash that is generated.

Klarman writes, and you will agree with him on this…

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.

What Are YOU Doing?
When I talk about the importance of holding some cash in your portfolio when attractive investment opportunities are hard to come by (like now), a lot of people argue that that is same as gambling, that being less than fully invested is akin to market timing.

“Who knows whether the market falls or rises from here on?” is what they ask me. “What if I hold cash and the market keeps rising?”

That’s a valid question, but then isn’t a yes or no decision the crucial one in investing?

Who says that investing means always buying something, even the best of a bad lot? An investor who can’t or won’t say no forgoes perhaps the most valuable tool available to him or her.

As Charlie Munger says…

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.

And then, here’re Warren Buffett’s classic words of wisdom…

“Lethargy bordering on sloth remains the cornerstone of our investment style.”

You don’t need to always be in action, dear investor. Don’t be a yield glutton, as Klarman says. Holding cash when you have nothing to buy is a good decision.

It’s painful, but not knowing what you are doing with your cash and why you are doing it, often ends up being more painful for your long-term returns. So, please choose carefully.

http://www.safalniveshak.com/painful-decision-to-hold-cash/

Discussions
1 person likes this. Showing 10 of 10 comments

calvintaneng

If there is no clarity don't simply invest. Better keep to Cash. But if you are SURE then you must act and deploy cash.

2015-03-20 16:13

calvinwky168

to share my experience, I diversified. The world is getting smaller. It is easier to travel to another country compared to years ago. It is easier to manage your funds through the internet than years ago. It is easier to invest in another country than years ago.

The world is my oyster. Msia too small. Besides, since 1998, I have noticed the ringgit is weak, KLSE also weak.

I diversified into other countries.
Now, you can open FD in another country.
You can purchase shares in another country.

Example:
in 2011, CNY to RM was about CNY2.2 to RM1.
now it's CNY1.7 to RM1.
If you opened FD in China's bank in 2011, say CNY50000 and earn the interest say 4%pa. Then in 2015, you bring all back and exchange to RM, you gain extra due to exchange rate.

example:
in 2011, capital needed to open FD for CNY50k = about rm22727
end of 1st yr = 50k x 1.04
end of 2nd yr = ....
....... 3rd yr = ...
.... 4th yr = about CNY58490.
bring back to Msia in 2015 = about RM34405.

Now, you think you open public bank FD in 2011 with the same RM22727 and interest 4%pa can get return of investment (ROI) of RM 11678 in 4yrs? Do the maths urself, do not be lazy!

The world is your oyster. jangan jadi katak di bawah tempurung
jangan jadi jaguh kampong saja. syok sendiri only.

Same goes if u open Sing dollar, Aussie dollar, etc...
Key here is the currency must be a stronger one than ringgit.
Key here is ur account must be from that country, not thru Msian banks or securities company.

Same thing goes if you purchase a dividend share in these stronger countries rather than KLSE.

You want me to show example on dividend shares from another country? Don't rely on tongkat la. Gi belajar, belajar, belajar sendiri....

The world is your oyster!

2015-03-21 00:56

calvinwky168

to share my experience, I diversified. The world is getting smaller. It is easier to travel to another country compared to years ago. It is easier to manage your funds through the internet than years ago. It is easier to invest in another country than years ago.

The world is my oyster. Msia too small. Besides, since 1998, I have noticed the ringgit is weak, KLSE also weak.

So I diversified into other countries.
Now, you can open FD in another country.
You can purchase shares in another country.

Example:
in 2011, CNY to RM was about CNY2.2 to RM1.
now it's CNY1.7 to RM1.
If you opened FD in China's bank in 2011, say CNY50000 and earn the interest say 4%pa. Then in 2015, you bring all back and exchange to RM, you gain extra due to exchange rate.

example:
in 2011, capital needed to open FD for CNY50k = about rm22727
end of 1st yr = 50k x 1.04
end of 2nd yr = ....
....... 3rd yr = ...
.... 4th yr = about CNY58490.
bring back to Msia in 2015 = about RM34405.

Now, you think you open public bank FD in 2011 with the same RM22727 and interest 4%pa can get return of investment (ROI) of RM 11678 in 4yrs? Do the maths urself, do not be lazy!

The world is your oyster. jangan jadi katak di bawah tempurung
jangan jadi jaguh kampong saja. syok sendiri only.

Same goes if u open Sing dollar, Aussie dollar, etc...
Key here is the currency must be a stronger one than ringgit.

Same thing goes if you purchase a dividend share in these stronger countries rather than KLSE.

You want me to show example? Don't rely on tongkat la. Belajar, belajar, belajar....

The world is your oyster!

2015-03-21 01:02

Kevin Wong

Long term investors, stay almost fully invested at all times. Otherwise...its just market timing.

2015-03-21 12:11

calvintaneng

calvinwky168

While it is Ok to diversify we must also be very sure outside the area of our competence.

What if you park your money in HK or Singapore Mini Bonds?

What if you bought into Russian Rouble?

I have bought Some Shengsiong & Singpost shares in Singapore.

Both have done well due to their defensive nature.

However, I find more Bargains in KLSE all the time. Malaysia is an Investment Paradise For VALUE INVESTORS since majority 90% of the Media & people are short term speculators. Even The EdgeDaily Boss is dabbling short term & Focus Magazine often Focus on wrong stuff.

And TTB of Icapbiz is a market timer.

Dr. Neoh Soon Kean the Value Investor has retired & withdrawn from the maddening crowd. VALUE INVESTORS IN MALAYSIA ARE VERY FEW AND FAR BETWEEN.

SO THERE IS GREAT OPPORTUNITY.

JUST STAY PUT IN MALAYSIA!

2015-03-21 12:33

Kevin Wong

small investors should stay fully invested at all times, but of course do keep some spare $$$...for emergency sake.

2015-03-21 16:54

AyamTua

My Sifu Has Spoken.

Posted by calvintaneng > Mar 21, 2015 12:33 PM | Report Abuse

calvinwky168

While it is Ok to diversify we must also be very sure outside the area of our competence.

What if you park your money in HK or Singapore Mini Bonds?

What if you bought into Russian Rouble?

I have bought Some Shengsiong & Singpost shares in Singapore.

Both have done well due to their defensive nature.

However, I find more Bargains in KLSE all the time. Malaysia is an Investment Paradise For VALUE INVESTORS since majority 90% of the Media & people are short term speculators. Even The EdgeDaily Boss is dabbling short term & Focus Magazine often Focus on wrong stuff.

And TTB of Icapbiz is a market timer.

Dr. Neoh Soon Kean the Value Investor has retired & withdrawn from the maddening crowd. VALUE INVESTORS IN MALAYSIA ARE VERY FEW AND FAR BETWEEN.

SO THERE IS GREAT OPPORTUNITY.

JUST STAY PUT IN MALAYSIA!

2015-03-21 16:56

calvinwky168

haha.. dei macha
as an investor, only concern max.... my ROI.
I do not give a f..k which country, as long as making $$$ grow more than inflation.
given a bull market to a stagnant market to a bear market, no prize for guessing which to choose.

Im not gonna tell u where is the bull market, which country's index just broke all time record this year. if u cannot find it, then ur stupid.

at the end of day, it's $$$ that counts. no sentimental to any shares, any country.

ciao..

2015-03-22 00:33

CFTrader

CASH ... is also one of the position, other than BUY and SELL...

What the people here discuss are capital management...
It is a higher level of discussing than discussing the value of stocks or what...


You can have 1 single position DSONIC that gives 1000% return but overall portfolio are in loss..

You can have 10 losing position that have 5% loss per trade, but all the trades are migitated by 1 single winning position.

That's The wonder of POSITIONING / CAPITAL MANAGEMENT.

2015-03-22 00:42

CFTrader

Most of the people will only finding the way to achieve Maximum ROI.
This year they earn 100% .
Next year they earn 85%.
The next next year, wipe out 80% of the portfolio.
What do they left ?

Learn how to survive at forest is much more better than finding the juiciest lamb .... You never know that there will be hungry packs of wolf approaching you from your six...

Stay alert. Watch your back. Then you will survive.

2015-03-22 00:46

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