Welcome to the October 2021.
Robert Kiyosaki’s ‘Rich Dad, Poor Dad’ played a big role in triggering my interest in the world of money and finance. I am sure this is the case with quite a few of you. In fact, I have a few friends who’ve resolved to make the book a mandatory reading for their kids when they are ready to understand it.
The book is a classic example of how a powerful message delivered in a simple way can leave an everlasting impact.
When it comes to the stock market, it’s always better to steer clear of predictions. No one, and absolutely no one, has any idea of where the stock market is headed next.
Thus, if you believe any market guru’s stock market prediction skills and are even willing to bet big on it, you may have to reconsider your decision. It’s not for nothing that investment legends like Warren Buffett, Peter Lynch and many others, often talk of having no expertise in predicting Mr Market’s next move.
‘A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting’, Buffett once observed.
Peter Lynch was even more savage. ‘Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves’, argued the legendary fund manager once. However, unlike Peter Lynch, we don’t believe in being 100% invested in stocks all the time. We believe in staying at least 25-10% in bonds at all times. And this number can easily go up to even 75% if we find the stock markets to be extremely over valued.You may think that this is nothing else but trying to predict a stock market crash.
Well, we call it being always prepared for a crash and not predicting it.This rule does two important things for us. One, it allows us to lose less in a bear market than the typical investor.
This is because he is 100% invested in stocks and we are only 90% or lower. Thus our corpus suffers less damage than his. You may say that this puts us at a disadvantage in a bull market because a 100% stock portfolio is expected to do well in a bull market than one that’s only a maximum of 90% invested.
Yes, that’s right. However, we are hoping that over the long term, our outperformance in a bear market more than compensates for the underperformance in a bull market and net-net, we still end up doing better than the benchmark index. The second advantage with this rule of being at least 25-10% in cash is that it keeps giving good opportunity to do bargain buying.
You see, it’s easy to say that one should buy low and sell high. However, in practice, most investors end up doing the exact opposite.
The fear of missing out forces them to take more exposure to stocks at market highs. Also, the fear of losing their capital doesn’t allow them to buy stocks right after a crash, when that’s the more rational thing to do.
Therefore, having cash to the tune of at least 25-10% allows us to book profits at market highs to rebalance the corpus and take more exposure to stocks after a crash, again to rebalance the corpus.
Thus, you are doing the right thing from a long-term perspective i.e. buying low and selling high. In the stock market, it should be less about what the stocks are going to do and more about what you are going to do.
Having a well-defined process like we do, does put an investor into a strong position over the long term.