Selected excerpts from the Knowledgebase -12

Selected excerpts from the Knowledgebase -12

I’ve decided to do a daily small excerpt from the Knowledgebase as sort of a thought for the day. In many cases they will have extra thoughts of mine, or small updates. I hope you’ll find them interesting.


Here’s the twelfth:

On staying fully invested: I believe that you’d be much better off staying nearly 100% in the market and just deciding WHICH stocks you want to invest in, instead of complicating it with deciding WHEN you want to buy, and trying to time the market. For example, you don’t want to buy now because the market is up, but I suspect you didn’t want to buy at the bottom either, because then everyone was saying that the market was going lower. And if stocks go up 10% from here you certainly won’t want to buy, but if they go down 10% from here, you’ll wait for down 20%, but then if they start back up you’ll wait for them to get back to down 10% again, which may never happen. Just think, if you stay fully invested you can forget about all those crazy-making decisions, and just concentrate on which stocks you want to own for the long term.


For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board


The difficulty I have is that the time when money is made on the stock market is when it falls heavily. Good companies can become bargains and the watchlist, previously carefully cultivated and maintained, suddenly comes into its own.

This can be the time to raise the quality of the portfolio. If you are fully invested, you have two decisions to take instead of one. Bargains you now see cannot be bought without making sales. Difficult decisions may have to be made, even as your own holdings are falling. Your own holdings may now present an attractive opportunity to average down your book costs - but you have no cash to buy. You may find you are one of the ones who has been ‘swimming naked’ but there is nothing to do about it, it is too late. Your portfolio cannot be improved.

Of course it is possible you may see Nemesis coming and take evasive action in time. That was certainly true of the Great Tech. Debacle: many knew the whole thing was an almighty bubble and were ready to exit the scene without delay and did so.


If you are fully invested, you have two decisions to take instead of one.

In the words of the immortal Neil Peart as sung by the immortal Geddy Lee while the immortal Alex Lifeson rocked the freak out, “If you choose not to decide, you still have made a choice.”

Choosing to hold cash instead of investing it is in itself a decision. So choosing to hold cash, then choosing to deploy it into XYZ is still two decisions that have to be correct in order to achieve gains.

Another way of looking at it is to treat it just like any other holding in your portfolio. Barring the effects of inflation, strength of the dollar, etc., cash is just another asset in your portfolio - albeit one with virtually guaranteed 0% gains/losses.

If one buys into the notion that in the long run the market will inevitably rise as a whole (and why would one not?), then the all in approach makes total sense.

Cheers and \m/



On a minor point, I made my starting point a portfolio where cash is held. It is semantics to assert that I should have gone further back to make the additional decision to hold cash in the first place making 3 decisions! (You could add that I made the decision to own a portfolio in the first place, making 4 decisions, or to work to earn money to invest, 5 decisions!)

A fallacy (one beloved of TMF) lies in the words of your last sentence ‘in the long run the market will inevitably rise’. The fallacy lies in the history of the market which shows the times when ‘the long run’ has involved decades before the market regained its value in real terms. The fact that it later ‘inevitably’ rose was cold comfort to investors within that period.



A fallacy (one beloved of TMF) lies in the words of your last sentence ‘in the long run the market will inevitably rise’.

Ok, then let’s not refer to the market as a whole. Let’s apply the same logic to our portfolios. That’s really what matters, right?

If we didn’t believe the stocks we cumulatively hold in our portfolio will eventually rise within whatever respective time frames we intend to hold them we wouldn’t buy them.

Assuming we can agree on this, then holding cash vs. deploying it into stocks that one believes will rise over one’s desired holding period seems counterproductive to achieving gains.

Setting aside the whole semantics thing, my point is it’s valuable to look at cash just like any other asset in my portfolio. Like any other asset, there is downside risk.

The biggest one with cash is opportunity cost and I think that gets overlooked/downplayed by many espousing the ‘hold cash while waiting for market pull back’ philosophy.

To your point about those periods where the market has taken a decade or more to get back to a previous level, if my holding period is less than it will take for a recovery to take place, then deploying cash at the bottom won’t help much, since I won’t be holding long enough to fully benefit from the recovery.

You may argue that I just need to pick the stocks that will recover most rapidly when the recovery occurs so I’ll still make solid gains even if I sell before a full recovery.

I’d counter that the ones that are most likely to recover most strongly during a recovery are probably the same ones that rose 50% while I waited for a 25% pullback to buy them ‘cheaply.’



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Thanks Eric. I agree that what our portfolios do is more important than what the market does and we would not be here unless we thought we could do better. Nevertheless market valuation cannot be ignored. Those playing safe in the '70s and '80s might have chosen PEP, say, as one of their rock-solid ‘nifty fifty’ companies to see the PE fall from 30 to 10. Despite the serious inflation of the time, cash might have been quite reassuring!

When I see the PE column of my portfolio, I am apprehensive about the risk I am taking and the nature (technological) of so many of my companies. Sometimes a good company can still be found on a PE of about 9 and despite risk (usually small capitalization or being diluted) it is like striking gold and about as rare.

Cash has one all-important purpose: on a proper, old-fashioned collapse, you can pick your moment to average down small increments into a three or four ETFs to the bitter end. Don’t run out of money before the end! Afterwards, you can just put your feet up and retire from this strange game.

I am conscious that our host would prefer us to stick to the point, companies of interest, so will wind this up my end.

Nautilus is taking quite a beating on no visible news. Maybe it is the prospect of sales of gym equipment in a recession that’s doing it but I am going to gamble and double my very small investment.

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