| Free Article |
Don't be Rhinophobic
by David Van Knapp, author of
SENSIBLE STOCK INVESTING:
How to Pick, Value, and Manage Stocks
and
THE TOP 40 DIVIDEND STOCKS FOR 2010:
How to Generate Wealth or Income from Dividend Stocks
January, 2007
Rhinophobia is an investor’s disease: the dread of having any cash. The
rhinophobic feels that all of his or her “stock money” must be fully invested at
all times.
Let’s say you are an individual investor and have settled on an asset allocation
of 60% stocks, 40% bonds. So if your total investable money is $100,000, then
$60,000 is your “stock money.”
Question: Should all of your stock money always be invested in stocks? If you
answer “Yes,” you have rhinophobia and should see a doctor. Or just read the
rest of this article. Because the better answer—more likely to keep you
financially healthy—is “No.”
It is an unfortunate myth in the stock-investment industry—including many
pundits and mutual funds—that the smartest investors are fully invested at all
times. In other words, they invest cash as soon as they get their hands on it,
“never sell,” and if they do sell, they reinvest the proceeds immediately. This
myth is obviously a corollary of a dogmatic Buy-and-Hold ideology.
The reason that the myth is unfortunate is that it causes people to lose money.
It is the reason why so many investors who were fully invested when the
market peaked in early 2000 stayed fully invested as the market went all the
way down, rather than getting out until the crash stopped. It’s also why many of
them will stay fully invested the next time a bubble pops or a bear market claws
them up.
Even those perceived to be the most conservative stock investors—“value”
investors with a Buy-and-Hold bent—in fact time their moves to avoid
rhinophobia. They do it when they decide not to purchase a stock because it
does not meet their valuation criteria (“We’re waiting for a better price”), or to
sell a stock because it has met their target price (“We think this stock has had its
run—we are very disciplined about selling when a stock hits our target price”).
They are actually practicing a form of (cover your kids’ eyes here) timing.
If you ask the average person what Warren Buffett’s investing style is, he or
she is likely to say, “Buffett is a value investor with a Buy-and-Hold approach.”
And that would be generally accurate. But Buffett avoids rhinophobia. Here’s
what he said in his 2003 annual letter to Berkshire Hathaway shareholders:
“Sitting it out is no fun. But occasionally, successful investing requires
inactivity.” As recently as May, 2006, Forbes magazine reported that "Buffett,
to the vexation of investors, is sitting on a mountain of cash and bonds (50% of
Berkshire's market value) waiting for better opportunities."
Why would that vex Berkshire Hathaway shareholders? Buffett obviously
knows what he’s doing, judging by his record over the past five decades. He is
the world’s richest person whose wealth came entirely from investing. What any
“vexed” shareholders are forgetting, and he is not, is Rule #1 in stock investing:
“Don’t lose money.” Sometimes, not losing money requires the Sensible Stock
Investor to have his or her “stock money” in cash, not in stocks.
If, for whatever reason, you sell a stock, there may be times when you do not
want to reinvest the money right away. Rather, you may want to hold it in cash
for a while, until conditions change for the better. Same thing if you come into
possession of new money. Don’t be afraid to be uninvested. If you cannot find
enough good places for your “stock money,” let it sit in cash until valuations
improve, market conditions change, or you discover a promising new
investment opportunity.
In other words, your strategy as a Sensible Stock Investor should include a
strategy for cash. To manage a stock portfolio sensibly, cash is a legitimate
parking place for “stock money” when:
• You’re in a generally declining or sideways market—nothing seems to be
doing well.
• You’re in a deflating bubble, like the 2000–2002 deflation of the 1990s
bubble.
• No great stock investment opportunities are apparent.
• You are in a protection mode.
When you are an individual investor, it is like running your own little business or
mutual fund. You want to run it intelligently. Now, the excellent companies that
you invest in do not ignore timing in running their own businesses. They do not
mindlessly charge ahead with relentless product introductions, marketing
campaigns, and acquisitions, regardless of the economy, interest rates, and their
own industry’s conditions. Sometimes, they hang onto their investable cash
(retained earnings) awaiting good opportunities. They study their markets,
identify trends and changes in their industry, and adjust their actions through a
continual process of strategic evaluation. They manage risks.
Don’t expect anything less of yourself as an investor. Why would you passively
hang on to all your stocks during an extended period of obvious market decline,
such as 2000–2002? It does not make sense. It is rhinophobia, a disease that
will make you poorer.
Don’t be rhinophobic. Your investment performance will be much better if you
inoculate yourself against this disease. Do that by exercising caution. Be willing
to invest new cash when you identify a promising opportunity, but do not feel a
need to be fully invested all the time. Cash is fine if good opportunities are not
apparent.
by David Van Knapp, author of
SENSIBLE STOCK INVESTING:
How to Pick, Value, and Manage Stocks
and
THE TOP 40 DIVIDEND STOCKS FOR 2010:
How to Generate Wealth or Income from Dividend Stocks
January, 2007
Rhinophobia is an investor’s disease: the dread of having any cash. The
rhinophobic feels that all of his or her “stock money” must be fully invested at
all times.
Let’s say you are an individual investor and have settled on an asset allocation
of 60% stocks, 40% bonds. So if your total investable money is $100,000, then
$60,000 is your “stock money.”
Question: Should all of your stock money always be invested in stocks? If you
answer “Yes,” you have rhinophobia and should see a doctor. Or just read the
rest of this article. Because the better answer—more likely to keep you
financially healthy—is “No.”
It is an unfortunate myth in the stock-investment industry—including many
pundits and mutual funds—that the smartest investors are fully invested at all
times. In other words, they invest cash as soon as they get their hands on it,
“never sell,” and if they do sell, they reinvest the proceeds immediately. This
myth is obviously a corollary of a dogmatic Buy-and-Hold ideology.
The reason that the myth is unfortunate is that it causes people to lose money.
It is the reason why so many investors who were fully invested when the
market peaked in early 2000 stayed fully invested as the market went all the
way down, rather than getting out until the crash stopped. It’s also why many of
them will stay fully invested the next time a bubble pops or a bear market claws
them up.
Even those perceived to be the most conservative stock investors—“value”
investors with a Buy-and-Hold bent—in fact time their moves to avoid
rhinophobia. They do it when they decide not to purchase a stock because it
does not meet their valuation criteria (“We’re waiting for a better price”), or to
sell a stock because it has met their target price (“We think this stock has had its
run—we are very disciplined about selling when a stock hits our target price”).
They are actually practicing a form of (cover your kids’ eyes here) timing.
If you ask the average person what Warren Buffett’s investing style is, he or
she is likely to say, “Buffett is a value investor with a Buy-and-Hold approach.”
And that would be generally accurate. But Buffett avoids rhinophobia. Here’s
what he said in his 2003 annual letter to Berkshire Hathaway shareholders:
“Sitting it out is no fun. But occasionally, successful investing requires
inactivity.” As recently as May, 2006, Forbes magazine reported that "Buffett,
to the vexation of investors, is sitting on a mountain of cash and bonds (50% of
Berkshire's market value) waiting for better opportunities."
Why would that vex Berkshire Hathaway shareholders? Buffett obviously
knows what he’s doing, judging by his record over the past five decades. He is
the world’s richest person whose wealth came entirely from investing. What any
“vexed” shareholders are forgetting, and he is not, is Rule #1 in stock investing:
“Don’t lose money.” Sometimes, not losing money requires the Sensible Stock
Investor to have his or her “stock money” in cash, not in stocks.
If, for whatever reason, you sell a stock, there may be times when you do not
want to reinvest the money right away. Rather, you may want to hold it in cash
for a while, until conditions change for the better. Same thing if you come into
possession of new money. Don’t be afraid to be uninvested. If you cannot find
enough good places for your “stock money,” let it sit in cash until valuations
improve, market conditions change, or you discover a promising new
investment opportunity.
In other words, your strategy as a Sensible Stock Investor should include a
strategy for cash. To manage a stock portfolio sensibly, cash is a legitimate
parking place for “stock money” when:
• You’re in a generally declining or sideways market—nothing seems to be
doing well.
• You’re in a deflating bubble, like the 2000–2002 deflation of the 1990s
bubble.
• No great stock investment opportunities are apparent.
• You are in a protection mode.
When you are an individual investor, it is like running your own little business or
mutual fund. You want to run it intelligently. Now, the excellent companies that
you invest in do not ignore timing in running their own businesses. They do not
mindlessly charge ahead with relentless product introductions, marketing
campaigns, and acquisitions, regardless of the economy, interest rates, and their
own industry’s conditions. Sometimes, they hang onto their investable cash
(retained earnings) awaiting good opportunities. They study their markets,
identify trends and changes in their industry, and adjust their actions through a
continual process of strategic evaluation. They manage risks.
Don’t expect anything less of yourself as an investor. Why would you passively
hang on to all your stocks during an extended period of obvious market decline,
such as 2000–2002? It does not make sense. It is rhinophobia, a disease that
will make you poorer.
Don’t be rhinophobic. Your investment performance will be much better if you
inoculate yourself against this disease. Do that by exercising caution. Be willing
to invest new cash when you identify a promising opportunity, but do not feel a
need to be fully invested all the time. Cash is fine if good opportunities are not
apparent.
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