What to do if there is no stock to buy?

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Investing is difficult.

Target No investing—sitting around with cash and not finding stocks worth buying—is more painful.

After all, for most of us, activity equals success.

The need to stay always active is what leads CEOs to make poor capital allocation decisions, especially in heady times. And that leads most investors — big and small — to buy overpriced stocks.

We all want to be in the center of the action – in large part because we hate the feeling of missing out on the party.

But then, as Charlie Munger says…

It takes character to sit around with all that money and do nothing. I didn’t get to where I am by chasing mediocre opportunities.

What to do if there is nothing to buy?
That’s one of the most common questions I get asked these days.

“I don’t find value in the stock market anymore,” asked a friend. “What should I do now?”

“Collect the money,” I replied.

“But that’s hard. he said.

“Why?” I asked.

“Because cash in the bank is a wasted opportunity,” he replied. “And why should I hold cash when it pays nothing, when stocks can grow my money much faster?”

Over the years and after learning my lessons the hard way (from not holding cash), I have found several reasons to “hold cash” when I have nothing to buy. Here are the two biggest ones –

  1. When paying in cash nothing and stocks are more likely is losing, nothing beats is losing.
  2. If I don’t have cash, it’s almost impossible for me to take advantage of opportunities that may arise in the future.

Accepting these reasons has made me fearless to hold/hoard cash when I don’t find (great) value in the stock market.

Of course, this is not with the intention of timing the market – which is impossible. The intention is to avoid action when I find no reasons to act.

As Seth Klarman wrote in his wonderful article titled Painful decision to hold cashthe idea is –

…stay liquid, defy the constant drumbeat of performance pressures and wait for prices of at least some securities to decline. (One does not need the entire market to become cheap to make significant money, just a limited number of securities.)

But then, as Klarman also wrote –

Human beings are gifted with so much patience after all. Few can look past the short-term returns and today anything seems to offer better returns than cash.

Investors also leave the possibility of underperformance that comes from sitting on the sidelines, due to their relative performance oriented competitive nature; they will find that it is better to be in the game (unless the market goes down of course). Most significantly, they remain heavily skewed toward the greed (how much can you make?) and away from the fear (how much can you lose?) end of the investor emotion spectrum. In short, investors remain devouring returns, looking for a high return regardless of the likelihood of actually achieving it or the risk they take in the process.

You see, investing doesn’t always mean “buying something”.

In fact, as Warren Buffett said –

Great success can be attributed to inaction. Most investors cannot resist the temptation to buy and sell all the time.

Here is an observation from Prof. Sanjay Bakshi, to whom I asked this question a few years ago –

There is no “buy nothing” situation. If you ignore transaction costs and taxes, you are in effect, selling all the shares you want to hold and buying them back every day at the market price. Staying invested in a position is the functional equivalent of selling for cash and placing that cash in the position at its prevailing market price.

I think you mean “nothing new to buy”. But if you think about it that caution, disconnection occurred. If you are actually “buying” your existing positions every day, then when you say there is nothing “new” to buy, aren’t you also really saying that you prefer to own what you do, but don’t you? do you want to deploy new cash on these positions? Now, there may be good reasons not to put new cash into old positions, but the reason can’t be because your old positions are overvalued, because if they are overvalued, why are you actually buying them today?

Two good reasons for not putting new money into old positions can be: (1) the need to diversify; (2) setting aside capital in anticipation of a new, lucrative opportunity that will present itself at the right time, in which you prefer to hold cash (Mr. Buffett uses this “carry-a-loaded-gun-waiting-for-the-right-elephant-approach” ).

If there is nothing new to buy, you are still buying cash by doing nothing. Cash has tremendous option value, but yields a negative real rate of return. Sometimes, in life, when all the choices are bad, you just choose the least bad choice.

What else could you do? Holding cash that yields a small negative return may not be a great choice, but it’s better than holding other assets that can depreciate significantly.

Another piece of advice when investors are faced with such a difficult choice is this: Lower your expectations.

Finally, here’s what Vinod Sethi, former MD and CIO of Morgan Stanley India, advised in the second episode One percent show

People have this natural urge that if I’ve spent 100 hours on something, I have to act. Whereas my view is to act when prices go up or down, not until you’ve done your homework. The market is not waiting for you to do your homework for prices to go up or down. I would always urge many of my analysts, myself included, to separate analysis from decision making. Because you spent a hundred hours on something, you don’t need to act.

The key to being a good money manager is not to act or conflate your hard work with your activity. Disconnect the two. Keep working because the point of conviction and intuition comes when it comes. But by then your homework should be done. You shouldn’t be running around doing homework at that time because this point of intuition will occur when this happens. It all sits in your brain. But you act when your intuition awakens. In a way, the market whispers in your ear.

At the end of the day, I’d say it is. Because there are 10,000 listed stocks and why should you focus on anything? You have to do a lot of work, but don’t believe or be under the illusion that your work has brought you this great idea.

Work has given you the foundation for good seeds to grow. It is like a garden that has been well fertilized and watered to make some roses bloom. This is your daily research. But the act of the rose’s arrival occurs when a confluence of events occurs, such as when a stock is dirt cheap or forgotten or expensive. It’s the real world out there and you’ve got your homework to do.

Let’s put it this way. It’s like a woolly mammoth is charging at you and I give you a gun with a few bullets. You can answer in two ways. I gave you a gun with bullets so you can start shooting. Another way to look at it is to just sit back and shoot when the mammoth appears. So research is like loading a gun and having bullets. Chances are, a mammoth will appear. They are not connected. Having a gun gives you the arrogance to shoot and hit a mammoth. This is a classic mistake of most analysts.

In short, continue your work to identify great investment opportunities, but if the prices are not right and there is no margin of safety, don’t act. At least don’t act just because you’ve done the hard work. Stocks don’t bother with your hard work.

But when the time is right and you are ready, as Vinod said, the market will whisper in your ear.

Then act.


That’s about all from me for today.

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Thank you for your time.

Regards,
Vishal


Sketchbook of Wisdom: Now available at a special discount

Buy your book, which Morgan Housel calls “a masterpiece.” It features 50 timeless ideas—from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant—as they apply to our lives today. Click here to shop now for a special discountwhich is only available until September 15, 2023.

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