Suppose your favorite car is a Honda… which is worth Rs 10 Lacs. And in your city, there is only one Honda dealer. Now this Honda dealer is facing some unprecedented personal crisis and decides to close down his dealership. And since he wants to close down quickly, he wants to clear his stock of available, unsold cars at throwaway prices. In fact, he is offering a whopping 40% discount on your favorite model, if purchased within next 7 days.
So here you are faced with an interesting situation…
– You always wanted that Honda car. And you have absolutely no doubt about the brand or quality of the car.
– You did not have (or want to pay) Rs 10 lacs for the same.
– You are now getting it 40% cheaper at Rs 6 Lacs.
– You have 7 days to buy it.
– You are still 100% sure about quality, efficiency and beauty of the car and that, it has not deteriorated at all (with prices coming down to Rs 6 Lacs)
So what is that you want the most right now?
Of course…Rs 6 Lacs!!
But here is the problem. You don’t have Rs 6 Lacs. And your 7 days are over. The offer and your dream Honda car are gone.
You had the CRISIS (dealer was closing down) and the COURAGE (your belief that Honda remains good enough even if dealer closes down). But the only thing missing was the CASH.
You did not have the CASH to take advantage of the opportunity.
The same is applicable in stock markets as well.
Warren Buffett, in 2008 said:
“CASH combined with COURAGE in a CRISIS is priceless.”
With markets making new highs and being somewhat Overvalued, many people will laugh at those who are building up their cash reserves. And that is because of the perception that, it’s very easy to make money in markets and hence it does not make sense to remain in cash.
Yet CASH is the exact asset, which can help you buy wonderful businesses at really cheap prices (Remember 2009). Having a decent amount of cash (atleast when markets are not cheap) allows you to take advantage of any pullback in the market or any other opportunity that comes up. Holding Cash should be viewed as an opportunity, and not just as a cost. Now this strategy effectively means that you are ready to purposefully lose a small amount of money to inflation over this period. But that would be in exchange for the opportunity to offset it with a larger profit down the road. Now all investors may not have the mindset to endure this pain, caused by waiting for opportunity to strike. But for those who are patient enough, the gains can be, what Warren Buffet said – PRICELESS.
Also if you think that earning lower interest on your cash is bad and a drag on your portfolio, just wait until you are forced to liquidate stocks during the next bear market or in time of need.
Pardon me if all this makes me sound like a person advocating timing of markets. But this is not just about market timing. It’s more importantly about trying to avoid overvalued markets and trying to reduce the chances of making mistakes, and less about trying to find the bottom and pick the next multibaggers.
So if you think, I am making some sense here…then do bookmark this post for future reference. My idea of doing this post about market crisis during a bull run is simple. When markets around you are falling and you are losing your money, you will not be reading blogs about long term investing. 🙂