If you’ve been reading the news lately, both local and abroad, the state of the market seems to contain worries about an impending market crash. You can’t blame the media and pundits calling out that the market is about to crash. We have been in a bullish market for a long time. And sooner or later, it will crash. We just don’t know when and of what kind (different market crashes happen for different reasons).
Value Investing is Dead
A lof of value investors that I follow and respect is being tested in this environment. Some of them closed their hedge funds because they could not perform better than the market. Some of them underperforming and is being ridiculed proclaiming that the old style of investing is dead because the market has changed. Others, saying that “Buy and hold strategy is dead”.
These are all valid points. You should think carefully at what strategy you are trying to do. Value investing is being hammered lately. Because, as I said before, if the market do not have bargains, value investors will underperform. And it is happening. And that is why value investors are under performing or closing down their funds.
Is it time to worry?
Maybe. But if we look and think a little more deeply, what is the source of our worries? Since we can not predict nor control when the crash would happen, the only thing we can do is to protect ourselves and the actions we will do when the crash finally comes. People are worried of a crash happening because they can not afford a crash right now. They don’t want it. And the reason for that is because they have been speculating or buying expensive stocks hoping that it could go up and sell at a more expensive price.
Since value investors are always looking for cheap companies. The stocks they hold today are already cheap so when a crash happens, its not a correction of price for these companies, these are bargains that became even more bargains. So an investor is happy and welcoming of a crash than most people.
What to do to protect yourself from a crash?
The usual, have cash ready or invest in things that go up when a crash happens. I prefer to have cash because its easy. But for me, its not an active pursuit of keeping cash. When things are slow and there are no bargains to be found, you will sooner or later accumulate cash on your own without having to consciously think about it. For value investors, protection from a crash comes from the strategy itself. “Can’t find bargains? Fine, I’ll wait and hold on to my cash.”
When the crash comes
When the crash finally comes, there are things you should do. First, look at your watchlist. There should be some really good companies in there that you could not buy when there’s a bull market because everybody wants it and everybody knows its a good stock. In a crash, that is the time to buy a great company. You should not be buying just the cheap ones. You should buy the cheap and great ones you could hold on forever.
Second, you should not immediately buy all the stocks that went down on the very first day of the crash. You should wait for a little longer, until all the people you know are pessimistic about it. We can not pick the bottom of a crash, but we could always catch the falling knife. Both are scary things to do in a bull market let alone a crash. Which takes me to my last point.
Courage is more important than intellect
Warren Buffett said that you don’t need a very high IQ when it comes to investing, what you need is temperament. Graham also said at the end of the book Intelligent Investor that after all the analysis you’ve done, it all comes down to courage of taking action. And I realized this fact when I started investing in the wake of the 2008 financial crisis. I know that I do not have the education of a financial analyst or an economist. So it would be hard for me to compete with them head on. But I do know that I am sometimes reckless which can be a sign of courage? I don’t know. Quitting my job during the financial crisis can be interpreted as both courageous and reckless, but sometimes you can’t distinguish them so be careful. Be courageous when the crash comes. Do not be reckless. Crashes are the times when there’s a great transfer of wealth from the people who are impatient to the patient.
So don’t worry, be ready for the crash. But don’t expect it. Just keep looking for bargains and your searching will tell you if the market is overheating. Cash is perfectly good to have. Its an option when a crash happens.