Tuesday, May 21, 2013

Tadas Viskanta: "Cash is a Drug for most investors"

Tadas Viskanta - the author who wrote the book "Abnormal Returns" has recently tweeted:
 
"Cash is a Drug for most investors. Easy to start, difficult to kick. Always a reason not to get back in"
 

With the stock markets hitting a new high these days, the idea of holding cash becomes a scrutiny and natural options for investors. I know of a few investors around me who are selling off their equity holdings to raise more cash in order to "participate" in the next possible recession. The question becomes when will this "recession" comes?
 
In his book, Tadas Viskanta has made distinction between investors who hold "CASH as an investment" and "CASH as an asset" He advocates that Cash has over time only provided minority investors with positive real returns. Over time, by large holdings Cash has returned investors with negative real returns. Therefore a strategic allocation to cash, above and beyond what one would need in case of an emergency, represents a large opportunity cost. In his book, he said:
 
"Cash is at best a place for nimble investors to park assets, and avoid risk, while waiting for more attractive opportunities to present themselves."
 
However, the problem for this is that most investors who do this do not have the discipline nor the foresight to participate during a correction. They simply do not have a solid strategy for using these cash on an opportunitic basis. Their market timing investment strategy will always be a wall of worry. If the market corrects 5%, they will think that the market will correct more and so will wait for the next 10% correction. Once it corrects 10%, they will think that this is a recession and will wait for the next 20% correction, and so it goes on.
 
Some people are advocating that we are probably in a secular bull run period right now. If rightly so, then investors who are holding too much cash allocation will probably regret in a few years time after the market has run up higher and they could start employing their cash at the worst possible time, especially if they do not have the discipline.
 
Market timing is a gateway to cash addiction and a bad habit. Are you one of these investors?

4 comments:

  1. Replies
    1. Hi Uncle CW

      Nice timely reminder after a bloodbath today.

      Delete
  2. During boom time, keep track on a list of stocks you want to invest and build up your cash holdings.

    During market crashes, pump your cash into these stocks!

    Regards,
    SG Web Reviews
    www.sgwebreviews.blogspot.com

    ReplyDelete
    Replies
    1. Hi GS

      Good advice. Investors who are holding cash now must be hungry to enter the markets.

      Delete

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