“I won’t call the bottom, but I will have cash to invest if we get there”

With the COVID-19 virus pandemic, ensuing world chaos, and the plunge of the stock market , there have been a lot of “expert” ideas thrown about regarding the future of the stock market. Recently I received an email predicting that we would see another significant landslide in the stock market (as we were testing the 38.2% Fibonacci Retracement level). Last week, lots of “experts” were calling a low, and heralding a new era of investment. So which is it? How can so many “strategists” be predicting mutually exclusive opposites? Are they even experts, and more importantly, what should I do about it? Let me relay a story from my  college days for some inspiration.

My junior year studying economics at Yale was an interesting time in my life. I was behind on credits, AND I had to take a dreaded . . . WRITING CREDIT. The perfect candidate turned out to be titled: American Economic History. This class taught me a lesson that has revolutionized my personal outlook on investing because it taught me the importance of always having cash on hand. Here is the back-story:

The class was taught by a talented writing professor, who (I came to realize) actually had no clue what actually drives an economy . . . She claimed in the very first class, that because she had spent her life studying American economic history, she (and apparently all of her colleagues) knew the 08/09 crash was going to happen before it did. Among the many arrogant claims I heard at my time at Yale, this might have been at the top. My first thought to her was, if you called the crash before it happened, why aren’t you filthy rich. In due course her answer materialized: “…because I didn’t have access to any money to invest, I was unable to profit from the events that unfolded.” Even as a naïve college student, I thought to myself if you were so certain that you were right, you would have found the money or some different way to profit off of the event…

One of the books on the syllabus was titled: The Great Depression: A Diary, a diary of a man (Benjamin Roth) who lived through the Stock Market Crash of 1929, and actually built wealth during the Great Depression (at the time I didn’t even know that was possible). While the diary was as dry as the dust bowl, it left a lasting impression on me that I would never forget. This revelation centered on liquidity and the importance of ALWAYS having cash on hand. We constantly hear people talking about how “cash is king,” but it’s a much more compelling case when you hear first-hand stories supporting the statements (I actually highly recommend the book, particularly in these challenging economic times). 

In his diary, Roth observes the total devastation and how unprepared most people were for the crash. His saving grace was that he held a fair amount of government bonds and thus earned coupon income in a time when very few had any income at all. That way, when times were tough, he still had money to live on (he didn’t have to realize his losses), and he also had extra money to invest (to take advantage of phenomenal opportunities). Here is an excerpt from my final paper on how the Great Depression affected Roth’s beliefs about investment (I didn’t get an A):

However, Roth recognizes the limitations to buying in the market and comes to the conclusion that a very important limiting factor to the purchase of stocks during the depression was a lack of liquid capital: “business is being operated this morning in crazy-quilt fashion. No one will accept checks—and nobody has cash” (31). Because of the lack of cash, no one has the money to invest in the stock market when the stocks are at their cheapest. Therefore, Roth realizes that the key to success during the Depression lies in having cash to purchase the undervalued stocks: “This depression has indelibly impressed on my mind one thing—and that is the value of having on hand sufficient capital to cover emergencies. In the investment field it means the difference between success or failure to have enough capital to buy bargains when they are available or to hold on to investments thru thick and thin and not be forced to sell at a loss (175).

I don’t care about calling the bottom of the market because, even if I am wrong, I won’t be realizing my losses. I invested some of my cash two weeks ago. If I am right and the stock market has a “V” shaped bottom, I come out like a king. If I am wrong and the stock market declines again, it won’t matter, because I listened to Benjamin Roth. I won’t need the money I invested for years, and by the time I need it, stocks will very  likely have increased from where they are now. In addition, if the market does turn down again, I still have cash to invest at my next projected low. Either way, I am satisfied with the way I come out of this.

Regardless of what the experts are saying will happen in the stock market in the future, you should be setting yourself up for a position where you understand possible outcomes of your actions, and are willing and able to accept those outcomes. 

  1. Do your best to never be forced  to realize your losses
  2. Try to figure out a way to have enough capital on hand to cover emergencies
  3. Think about your liquidity requirements, time horizon, and risk appetite, and think about developing an action plan that you’re happy with

Winning the investing game is not about outperforming your colleagues, it’s about having a process and sticking to it. It’s also important to have a systematic and disciplined buy and sell system with information you believe in and is actionable.  Distinguish your process and cultivate a more nuanced perspective by reading Chaikin Morning Insights, co-written by our founder and our very own CMT (market technician) and attending our Members-Only Open Forums to get the most cutting-edge analysis of markets and top-of-the-line idea generation. As a relatively new investor I was early to raise additional cash at the end of February (Feb 23 and 26) because I trusted the process that our insights at Chaikin Analytics and PortfolioWise adhered to. 

At the risk of gloating, if my professor really was smart enough to call the crash of 08/09, maybe she should have listened to her own lectures and had some cash on hand so she could have profited.

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