Value investing – is it wise to stay in cash or remain invested?

I read in a recent article that a value investor has now holding mostly cash. Over the past few years, he probably had made some money. He mentioned that he has already divested out of stocks and stay mainly in cash for the past two years.  In all likelihood, he is timing that there will be a market crash or at least a major correction not too far ahead perhaps in a matter of 1-2 years.  In fact, he did mention that he will pick up some good stocks when the market crashes. Now the question is – should one cash-in or should one to continue to remain invested sitting on unrealized profit even after a good run. The chart below showed that many stock markets had a good run in the last 5 years.

 

A few possible scenarios could happen in the next 1-2 years.

(a)     If the market did really crash or undergoes a huge correction

In this case, he will be very glad that he had timed the market correctly and was able to pick up some good stocks and earned a difference between his higher sale position and his lower purchase position.

(b)   If the market continue to advance

In this case, he is likely to regret his action for selling ‘too early’. He is unlikely to buy at higher price any time soon and will be stuck with cash for a total period of 3-4 years since he had already cashed out. Given that he is a ‘value investor’ probably meant that he no longer saw value in stocks and decided to get out of them. Certainly, he would not buy the stocks when the prices of those stocks went up even higher unless he has ascertained that the fundamentals of the stocks that he had sold have changed for the better.   

 

(c)    If the market moved sideways or even in a gradual decline

Initially, he is likely to continue to wait in hope to get a ‘better price’ for his stocks. There probably would come to a time when he lose his patience and start to dabble in stocks again. As one of the readers rightly pointed out, it is actually quite ‘expensive’ to stay in cash in hope time the market. The opportunity cost lost in collecting dividends for the last few years could have more than off-set the gain even though he may manage to sell at a higher price and buy them back at a lower price. In timing a market, we need to be two time right – both in the buy and sell, in order to gain from it. 

 

Of course, if one is possible to see what is ahead of us, in every boom and bust of the stock market, then market timing is the best strategy. But when things are generally uncertain, the time in the market appeared to be a better strategy than timing the market. The simple logical reason to that is that stock markets generally go up higher in the long run. Just simply by being a passive arm-chair investor could have helped us make a huge profit as the market tends to go up in the long run. That was actually endorsed by Warren Buffet who mentioned that one should buy an S&P low cost index fund consistently to gain from it in the long run.

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.