Is Holding Cash A Good Idea in Current Indian Markets?

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?
It depends.
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)
Cash Indian Stock Markets
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?
Are you holding cash now waiting for stock markets to crash? Or you are regularly buying shares of good Indian companies?

WTF… Wrist Watch On EMI??

Either I am getting old or there is something seriously wrong with the way our generation has decided to manage their finances. Just last night, I was taking a stroll with my wife in South Mumbai when I saw a board outside a shop –

Wrist watches on EMI
A Ticking (Financial) Bomb On Your Wrist

This shop was selling wrist watches of some good medium-to-high-end brands. And it provided the customer an option of purchasing these wrist watches on EMIs!!
Now I am not saying that this is wrong. But seriously, isn’t it simple common sense to use loans to buy assets rather than wrist watches??

I am sorry that this post is short and a little aggressive. But I could not stop myself from sharing my agony at seeing such a financial crime being committed by young people. I don’t say that one should not indulge in buying what one likes. But there are other ways of buying a watch. Instead of taking a loan and paying EMIs, one can delay the purchase a few months and save money in a Recurring Deposit(or even a simple savings account) and then buy the product. Its that simple.

And this wrist watch thing was not just one-off case. My wife told me that now-a-days, even lady’s handbags are available on EMIs!!!!

I have nothing more to say. Period.


How to use Recurring Deposits to make money in Stock Markets!!

Strange…. isn’t it?

You must be thinking that how a boring recurring deposit (RD) can help make money in stock markets?
Though it may seem a bit strange, the fact is that it can be done easily. All it requires is some common sense and a little patience.

recurring deposit rd
Accumulating funds using RD

Now lets reason out as to why this can be done and why it makes sense.
So, according to you, when is the best time to buy stocks?

You will say that when they are cheap. You can have your own meanings of cheap. We think that markets are cheap when they are trading in lower parts of PE range of 12 to 24, i.e., closer the index’s PE is to 12, cheaper it is. And we have a valid reason to believe that markets are cheap at such valuations. You can read more at Do Indian markets bounce off PE levels of 12 and 24? & A PE analysis of Indian markets. You can also check the current state of markets to know about market’a current valuations.
Once we are able to sensibly judge when the markets are cheap, it makes sense to buy stocks of great companies at cheap levels. It is the concept of buying low and selling high (though we personally prefer not to sell if we have bought a stock really cheap).
So, now you want to buy stocks. But how do you fund it? Either you have a stash of extra cash which is waiting to be deployed. Or you can just crib over the missed opportunity. You know markets are cheap and you have the courage to go out and buy stocks. But you don’t have the cash. How much unluckier can a long term investor get. 🙁
But this fate is avoidable.
Its a given fact that markets will move up and down. So suppose markets today are trading at expensive valuations. Knowing that markets are supreme and you are just an average investor, you have opted for systematic investments in mutual funds. But you also know that a time will come, when stocks would be available at really cheap valuations. This thought should act as a trigger for you to start a simple recurring deposit. This RD would keep accumulating money, month after month. And don’t forget, this RD earns interest too.
Now suppose after 2-3 years, there is a market crash and stocks are available at really low prices. This is the time when you can use the money accumulated in RD to buy large quantities of great stocks, at really cheap prices.
It is as simple as that.

How to use RDs to make money in Stock Markets

Personal Example – The author still regrets that in mid 2009, with stocks available at throwaway prices, he could not purchase them in big numbers and wasted a good crisis.
Out of the trio of three Cs : CASH & COURAGE in CRISIS, the author desperately missed the first one.
Moral of the story
You cannot control the CRISIS.
COURAGE is also optional and situational. You will only know you are courageous when crisis is round the corner. So, in a way, even courage cannot be controlled.
But as far as CASH is concerned, if you plan well, you can accumulate cash to create a war chest to be deployed when markets crash. You then have the ability to buy stocks which you were waiting to buy in the next market crash.
What do you think?