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 –
- When cash is paying nothing and stocks have a greater probability of losing, nothing beats losing.
- If I don’t have cash, it is almost impossible for me to take advantage of opportunities that may present themselves in the future.
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.
Here are some great insights from Prof. Sanjay Bakshi whom I asked this question –
There is no “nothing to buy” situation. If you ignore transaction costs and taxes, you are in-effect, selling every stock you want to hold, and buying it back at market price everyday. Remaining invested in a position is the functional equivalent of selling it for cash and deploying that cash in the position at its prevailing market price.
I think you mean “nothing new to buy.” But if you think about that carefully, there is a disconnect. If you are, in effect, “buying” your existing positions every day, then when you say there is nothing “new “to buy, aren’t you also, in effect saying that you prefer to own what you do but don’t want to deploy new cash in those very positions? Now there may be good reasons for not deploying new cash in old positions but the reason cannot be that your old positions are overvalued, for if they are overvalued, then why are you, in effect, buying them today?
Two good reasons to not deploy new cash in old positions could be: (1) need to diversify; (2) setting aside capital in expectation of a new, lucrative opportunity arriving in due course in which you prefer to hold cash (Mr. Buffett uses this “carrying-a-loaded-gun-waiting-for-the-right-elephant-to-appear” approach).
If there is nothing new to buy, by doing nothing, you’re still buying cash. Cash has huge option value, but delivers negative real rates of return. Sometimes, in life, when all choices are bad, you simply choose the least worse choice.
What else could you do? Holding cash which earns a small negative return may not be a great choice, but it’s better than holding other assets which can greatly depreciate in value.
Another advice when investors face such difficult choices is this: Lower Your Expectations.
I also 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:
- Track market price less frequently: The stock market incentivises us to do activity. (So does CNBC and our broker!). In exuberant times, I try to disconnect myself from the market. I talk to less to market participants and try to isolate myself.
- Read sensible stuff: We are influenced by what surrounds us. So in exuberant times, it makes sense to surround us with sensible stuff. I often read Howard Marks, Ben Graham and Taleb to keep myself grounded. Marks’ memos are my favourite. All these help me being grounded. I also read a huge number of annual reports, industry reports and talk to a lot of industry people to get a sense of the actual on-the-ground situation.
- Concentrate on downside: Build pessimistic scenarios and try to work out how much downside can be there in any stock you are evaluating. Assume worst case scenarios and valuations.
- Do non-market stuff: I am into motorcycling and often go for fast, long rides with my brother. I am a movie buff and watch a lot of movies too.
Now you tell me – What do you do when there’s nothing to buy? Share in the Comments section below.
Also Read: The Painful Decision to Hold Cash ~ Seth Klarman