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What to Do When There’s Nothing to Buy?

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 –

  1. When cash is paying nothing and stocks have a greater probability of 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.

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Hi Vishal,
    This is an interesting and relevant article in current times when markets are near all-time highs.
    Analysts are talking about 30k sensex or 8k nifty and some of them even say when sensex might hit 1 lakh level in 5 years. All this buzz is being used to cash-in on the positive sentiment. Of course the economy is recovering and company’s earnings are improving, but nothing so dramatic has happened. Its only because of the elections and FII money the prices have gone up. At this level the downside risks can be high unless one has selected stocks based on thorough understanding of its intrinsic value and its business model. For a value investor these numbers are just for reference, and doesn’t really help take right decisions.

    At this time keeping cash at bank or in FD would be good unless you figured out a good undervalued stock, for which you can allocate a small sum. Doing nothing at times makes a lot of sense because one need not try to chase returns or numbers which are superficial – know the context and be patient.

    The investing world and media always talks about the best times as the good time to invest. In fact the opposite may be true. By holding cash one can get lesser returns (not lose money). Yes the post inflation returns can be insignificant but atleast your capital is safe and can be used for various needs. Cash also helps you meet other financial obligations or plans – be it insurance, buying a home, a vacation, pay off loans, pursue a hobby or passion, investment in gold, etc. There are several intelligent ways to deploy cash other than keeping in FD or Equities.

  2. Gaurav Bhagwat says:

    I keep money in FDs. In case I find interesting opportunity, I will take money out of FD and invest in company. Meanwhile I read books/reports. Also some daily spare time goes in cycling and photography (esp. in monsoon when landscapes are all the more beautiful)

  3. I am also grappling with the best use of the funds in today’s environment when earnings yields are low and prospective returns at least in short-medium term may be low.
    Can anyone share their perspectives on efficient usage of funds in such times? I think the key criterion include safety, decent yields and liquidity when opportunity in market arise.

  4. Naveen Gupta says:

    I agree with the point of being in cash but my experience says that investors most often are in cash when the bull market just starts but when they see that other investors are making money they throw all the caution to the wind and jump in later at much higher valuation so we should be in cash near the peak of the market cycle not at the bottom.

  5. Ravikiran says:

    Hi

    I suggest the following:
    1) Figure out your financial goals. For long term goals invest in equity. If you are not good at analyzing stocks, invest in index ETF through SIP
    2) If you are good at analyzing stocks, identify good stocks & do SIP. Don’t wait for right price. It’s impossible to time the market.
    3) If you still have spare cash, put it in FD. When markets go down, invest the FD money in Index ETF or stocks which you analyzed

    All the best!!

  6. Thanks Vishal for this timely article.

    I agree with Neeraj that the opportunities do exist (though few and not mouth watering) irrespective of Index. I’m spending more time of mine in RE investing space (core expertise) lately. One can spend time reading, building skills, businesses. Ajay Piramal has been more active than ever in RE, financials, infra (some of the abandoned areas) lately..see if we can imbibe some of this.

    Vikas

  7. Vikash kumar says:

    Vishal,
    1:Isn’t SIP a investing vehicle where we consistently invest irrespective of market conditions(dollar averaging).
    2: Lets say we accumulate cash for 2-3 years. Then we have a 2008 in Indian markets. Would we one have the courage to invest all that has been accumulated in past years in a single year (I am not timing about timing markets) but psychologically once we have cash and markets are down how can one get strength to invest ?
    I have this fear so maybe I need help here :-).
    3: Isnt it better to keep investing all times ( atleast a small amount ) and then as per market conditions do a top up? I understand we will not have Margin of safety at all times but lets say the company has growing moat so paying a bit overprice may not be an issue.

  8. Reni George says:

    Good Morning to you Vishal

    This post of yours is at apt time.This question raises in everybody’s Mind.Here I would like to add my two Paise knowledge (Why go for cents,a foreign denomination).This part of Investment process is the most rigorous and time consuming.If you can do this diligently,then you have nearly mastered 80 % of your investment process.

    You can learn this process by watching discovery channel,where the wild animals like tiger,lion,leopard etc wait for the kill.You see the process….they wait and wait….until the prey is very near to them and they are sure about the fact that this prey is going to be killed.They gather all their strength and resources for the Kill.

    Our waiting period in the market should be somewhat like this,collection of cash can be done with some processes….it can be a recurring deposit…it can be a liquid fund……and it can be savings account also…..you should look at what returns you are getting……you should look at what resources you are gathering.This dismal performance of retail investors is due to this very singular problem.They do not have the resources (CASH) lined up whenever such opportunities spring up .It is like holding the gun,but without bullets and waiting for the target.And please do not associate any time frame with this process.

    It may happen that you may be collecting cash for the next 1 year,2 year or it may even stretch to a period of 5 years.But remember one thing…Market does provide a window of opportunity to gobble up your target company at the price you wanted sooner or later.

    Right now I sold off some shares where…I think the valuation were more than what a justifiable valuation would be and I used this fund to buy a vehicle for my wife,instead of going for a loan.And I will collect the fund in a recurring deposit …so that instead of paying 12.5 % as an interest,I will be receiving an interest of around 9 %on that recurring.It may happen that the stock would rise from the point of my selling,but it would not deter me,because I sold it near my target and I would not feel bad about it.Because I have learnt to insulate myself from acting emotionally in the market and the process still goes on.

    We should remember this is the most crucial part of investment…this has a major impact on the overall returns you expect from the market.This does not mean you should stay away from the market.You could study the market,in forms of writing a memoir of your feeling in a notebook about your investment rationale.This will give you a clear idea of your investment thinking and would let you rectify your bad decisions the second time.I always maintain a journal in word where I note down this notations before buying or selling a stock.This helps me in improving my check list for a stock also cleanse my process for stock Investing.

    Good Post Vishal

    Happy and safe Investing

    Reni George

  9. Saisundar R says:

    Thanks Vishal, for this timely post.

    I had stayed out of market for a while and as I was looking to get back, market has ran up and I don’t find it attractive to enter now. This prompted me to come with the idea that I have been contemplating on recently. While the post itself and most of the above comments talk in similar lines, I would like to receive particular feedback on my views about Gold.

    I am planning to buy Gold ETFs now given Gold is typically counter cyclical to stocks and real estate. As market has a tendency to go through the correction cycle once in a few years and during those periods of market lows, Gold is at a high, it would help to move from Gold into stock at favourable position. I am not talking about timing the market in sense of waiting for the evasive low, but I am looking for the time when valuations are more reasonable.

    Also, as a plan B, Gold can be used for consumption in form of jewellery.

    Vishal and Other tribesman, please kindly share your views.

    • bharat shah says:

      i am just pointing out one aspect of investment in Gold through ETF: gold ETF unit is getting @1% lower every year than 1 yr before’s , as its AMC expenses is m coming from gold it held, as it has no income like equity share’s dividend.

      • Saisundar R says:

        Thanks Bharath,

        What is your view on the counter cyclical rally of Gold. Does it outweigh the ETF AMC?

        • bharat shah says:

          sorry, i have no view on Gold performance , nor on any investment as i am a lay investor. my only take is on GOLD ETF unit that the weight of gold represented would diminish by @ 1% than it before a yr , so in some 25 yrs it may decrease by 17% , irrespective of its price then.

  10. My question is do you sell a stock which is overvalued when you don’t have any where else to invest….Cause in most cases earnings have remained where they are and only the multiple has expanded, making everything look super expensive…..Typical of the early stage of a new earnings cycle or a bull market….. In a bull market it pays to be fully invested and so should one only sell when the cash can be deployed elsewhere and not on over-valuation alone???

    Thanks

  11. Pandu Mama says:

    Here is what Charlie Munger did – Link.

  12. bharat shah says:

    then i think , is there any time to completely hold in the market? i mean , you may have no. of equity shares in your portfolio and no. of shares under observation. then due to market condition, some may be for sale, some may be for buy , and some may be for hold. you can utilize the cash available for those buy. in case you do not find, i think, that may be market euphoria and you should sell all. particularly i am wary of holding 30% or more in cash/debt and still holding 20-25 stocks for a mutual fund scheme under the argument of heated market by the fund manager. may be the SEBI rules prohibiting them to sell all holding now.

  13. I am 3 yrs young in stock markets, I sold out my not so confident ideas in the recent rise (30% of the portfolio). Now moving this money to liquid funds. I believe quality is more important than price, and can buy steadily growing good companies at anytime if you could see the visibility for 3-5 years. I lack these skills so will wait for an opportunity to deploy my funds.

  14. R K Chandrashekar says:

    Hello Vishal
    Timely piece of advice and a big thank you.
    Cash is king; having said that, I do agree with Neeraj Marathe, that irrespective of the market exuberance there would be opportunities to pick stocks at reasonable valuations. Again its best to keep cash in the form of Liquid funds/ income funds, etc and do a systematic transfer plan to a diversified equity fund. One could even do a SIP with individual stocks. In my case, since most of my income is tax exempt( Dividends and long term capital gain), the interest portion-Bank and Corp FD upto 2.5 L (Sr Citizen ) do not attract tax. Besides Equity one could invest in alternate funds which invest in a portfolio of properties across the country. The initial investments are high, but soon we would have REIT’s- great diversification tool with much less investment.

    At the end of the day there is much more to life than money, stocks and more money!! Have a hobby, spend quality time with your family and friends and help the needy.

  15. I follow a simple solution here. During exuberant times, I keep cash in ICICI’s B2 account (a branch free account with Sweep-In facility). My cash automatically gets converted to FD (if it’s above Rs. 5000/-) and I can withdraw instantaneously whenever needed without any penalty/charge.
    I am waiting for a good opportunity to get in to the markets (really hard but managing with Vishal’s help). Till then, sweep-in FD holds good for me.

    Happy Investing….

  16. I have used the market exuberance to create cash and get my house interiors done rather than taking loan for it. After that I am sitting idle… And started collecting cash. Yes I agree in bad and good times, opportunities do exist.

    I will wait and wait… I am benefiting from the portfolio I created over last 4-5 years.

    Ashish 🙂

  17. Yogendra Sontakke says:

    Hi Vishal,

    Thanks for a timely reminder! Cash is king in these times. I like cash when my manager and colleagues start talking about stocks.
    I also remember someone saying that if one can’t see 2x or 3x of onces investment in 2 to 3 years, one should not be invested.

    Cheers,
    Yogendra

  18. anshul gaur says:

    Dear Vishal,

    When Markets are too costly for me, I still BUY. But I buy BOOKS.. Investing greats & other non investing books. Some would frown at my approach to spend money when I dont NEED to, but I have set a tgt for me to buy a book a month. After that, I forget about the market & other things (My wife included, which of course, I have to pay heavily for later :)) & I only wake up next month to take a de-novo look at Mr MArket. What say U???

  19. when there is no “valued time” in stock market to buy a particular script…
    one option is
    make a dummy portfolio you like after your reserch……at market price……and hold that porfolio for a long
    and sooner or later you will notice that oportunities are there
    in market…but our timing was wrong..

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