An investor’s life is tough. And most of the times, it is because of cash. He is either short of cash when he wants to invest; or he has too much of it when he should not invest.
Either way, ready-to-be-deployed-cash can become an investor’s biggest friend or an enemy.
So with markets ripe with predictions of coming bull market and expected rise in markets after the general elections, does it make sense to hold cash in current markets?
Note – Before we go ahead, please be informed that Indian large cap indices are currently trading at multiples close to 19, which I personally do not consider to be cheap.
So let’s go ahead…
The main purpose of holding cash now (or whenever) is to be able to buy shares at reduced prices.
(Note – I am not referring to mutual fund SIPs here. These should be continued irrespective of market fluctuations if you intend to invest for decades and not years.)
Now suppose I believe in the business model of IDFC and want to buy its shares at reduced prices. So I hold cash in case share prices of IDFC go down.
So is holding this cash a good idea? Will it be beneficial in the long run?
Either I hold cash, or I don’t hold cash.
Either share prices of IDFC go up, or they go down.
There are only 4 possible outcomes:
- I hold cash, IDFC goes down: I get to buy shares of IDFC at reduced prices. (I win)
- I hold cash, IDFC goes up: I generate little return on held cash*, and I lose out on (notional) capital gains. (I don’t win)
- I don’t hold cash, IDFC goes down: I have a (notional) capital loss. (I don’t win)
- I don’t hold cash, IDFC goes up: I have a (paper) capital gain. (I don’t lose)
Now I can only control whether I am holding cash or not. But I cannot control the markets, i.e. IDFC’s share prices.
One might say that probability of share prices going higher in future is more as the company has a sound business model. But at the end of the day, its only probability and we cannot control it.
So effectively, neither I nor anyone else knows the probability of IDFC’s share prices going up in future. And without knowing these probabilities, there is no way to know whether the decision to hold cash in current markets is a good one or not.
I have myself advocated the concept of holding or rather accumulating cash in Recurring Deposits and using it when stock markets are down. But though it does seem to be a sensible approach, there is no way to predict its success.
So it’s always a good idea to question your own assumptions and decisions. What are your thoughts?