A climate of fear is your friend when investing, and a euphoric world is your enemy, said Warren Buffett, the legendary American investor, in one of his letters to shareholders in 2014.
Rising interest rates are putting a higher value on the money printed. Central banks are sucking liquidity out of the financial markets by raising interest rates rapidly. Not long ago, financial markets were flooded with ‘cheap’ money.
With near zero-interest rates, asset prices rose around the world. As markets adjust to a tighter monetary policy, the same assets will likely diminish in value. If market pundits are to be believed, prices of equity assets and real estate will fall over the next few months. International lending agencies like the World Bank and the International Monetary Fund have already said that a global recession is imminent.
With most experts predicting a recession, businesses and households are likely to cut back on spending. That is likely to cascade further in 2023 for economic growth.
Equity investment prospects
If you are an investor in the stock market, you must learn the importance of keeping adequate cash in your portfolio. A simple reading of news related to the world economy would suggest gloomy days ahead.
You do not have to be a pundit to realise that you would need to save for a rainy day. The reference to Warren Buffett above highlights the importance of cash. However, it also means seizing the opportunity when the chips are down.
Cash is not just about keeping the oxygen for yourself when things go wrong. It is also about biding time and waiting for your moment in the market. In his letter to shareholders for the year 2014, Warren Buffett explains the concept of ‘seizing the moment’.
He said that many long-prosperous companies suddenly wondered whether their checks would bounce in the days ahead in September 2008. “In about three weeks spanning late September and early October, we supplied $15.6 billion of fresh money to American businesses,” he said.
That was possible for his company because they always maintained a sizeable cash position in their portfolio. In 2011, Berkshire’s top investments were worth just under $77bn (cost $48bn). By 2021, existing and new investments (including $31 bn in Apple) were worth $350bn (cost $105bn).
As an investor, you want to learn from these tactics.
For businesses, cash is the oxygen. Warren Buffett believes in keeping more than adequate cash to secure businesses. The stock market also favours businesses that generate cash flows. In such a situation, corporate and individuals tend to cut discretionary spending.
However, companies making essential goods and services continue to generate steady cash. While cutbacks are made on luxury goods by wealthy individuals and expenditures by businesses, they continue to spend money to keep existing operations going. Investors buy shares of those companies that make those essential goods and services. The BSE FMCG index rose 17%, while the Sensex will be flat in 2022.
Equity investment is not just about being aggressive. It is also about holding cash and biding your time for the right moment. If the world is all set to witness a gloom and doom scenario, you must be ready to strike some bargains. If you are fully invested right now, you may want to create a cash position and hold on to that till the imminent fall happens.
The other strategy is to use the ‘buy on dips’ formula. Just like you make systematic investments through mutual funds, you can create a systematic equity plan or SEP. You can either allocate small amounts monthly or wait for the stock to correct and keep buying every time it falls.
To sleep well, you must ensure that you are not dependent on others. Taking a leaf out of Buffett’s letters, you need to be financially impregnable and never dependent on the kindness of strangers or even friends. If you get an inheritance or sudden inflow of funds, you must put it in a high-yielding debt instrument. Invest it when everyone cries gloom and doom. Cash in hand today is like the oxygen supply for tomorrow.