Go To Cash

Peter Lynch once said: “Far more mon­ey has been lost by investors prepar­ing for cor­rec­tions, or try­ing to antic­i­pate cor­rec­tions, than has been lost in cor­rec­tions them­selves.”

War­ren Buf­fett liked that one so much he repeat­ed it.

And yet, every time mar­kets get wob­bly — and right now, with the US-Iran war push­ing oil toward $100 a bar­rel and the Strait of Hor­muz block­ade threat­en­ing what the IEA is call­ing the largest sup­ply dis­rup­tion in oil mar­ket his­to­ry, they are very wob­bly — the advice comes flood­ing back: go to cash. Pro­tect your­self. Sit it out. Wait for the bot­tom, then buy back in.

On the sur­face of it, this makes sense.

Here’s the prob­lem: nobody can actu­al­ly do it.

Not the tim­ing part. Not reli­ably. Not even Howard Marks, who has been doing this for 50 years and is one of the smartest peo­ple in the busi­ness. His view? “In my expe­ri­ence, most peo­ple who are lucky enough to sell some­thing before it goes down get so busy pat­ting them­selves on the back they for­get to buy it back.”

But for­get the buy­ing-back prob­lem for a moment. Let’s just talk about what sit­ting in cash actu­al­ly costs you.

Accord­ing to Hart­ford Funds, if you’d been invest­ed in the S&P 500 over the last 30 years but missed just the 10 best days, your returns would have been cut in half. Miss the 30 best days — 30 days out of rough­ly 7,500 trad­ing days — and your returns drop by 84%. And here’s the part that should make any cash-hold­er ner­vous: 76% of the mar­ket’s strongest days hap­pened either dur­ing bear mar­kets or in the first two months of a bull mar­ket.

Here’s the kick­er: the mar­ket’s best recov­er­ies hap­pen fast and with­out warn­ing. If you’re in cash wait­ing for the sig­nal to get back in, you’ll almost cer­tain­ly miss them.

We saw a per­fect illus­tra­tion of this on April 8th. Mar­kets had been tank­ing on war fears. Then a US-Iran cease­fire was announced and the Dow surged over 1,000 points in a sin­gle ses­sion. That was one of those days. If you’d been sit­ting in cash wait­ing for things to “calm down”, you missed it.

This is the trap. The instinct to go to cash feels like pru­dence. It feels like doing some­thing. And right now — with econ­o­mists pre­dict­ing reces­sions, oil prices spik­ing, and war head­lines every morn­ing — I under­stand the temp­ta­tion more than ever. Even Tony, who’s been at this for 30+ years, would tell you the macro pic­ture looks gen­uine­ly alarm­ing.

But that’s exact­ly the point. We don’t actu­al­ly know what the mar­ket will do next.

We’ve said this on the show for years, and it keeps being proved right. And yet mar­kets keep sur­pris­ing us — both up and down — and nobody calls the turns with any con­sis­ten­cy.

So in QAV, we don’t try to.

Instead, we use a rules-based sys­tem to tell us when to act. When a stock drops below our Sell Line, we sell. When the check­list iden­ti­fies a high-scor­ing stock at a com­pelling val­ue, we buy. We’re not sec­ond-guess­ing the macro. We’re not read­ing head­lines and mak­ing gut calls. We have no opin­ion about whether the Iran war will cause a reces­sion — because that opin­ion would­n’t be reli­able, and even if it were right, we still would­n’t know when to get back in.

There are times when the sys­tem nat­u­ral­ly puts us in cash — when the check­list can’t find any­thing worth buy­ing. But that’s a dif­fer­ent thing entire­ly from going to cash because you’re scared.

Think of it this way. Our sell trig­gers are our hel­mets and seat belts. There’s real risk in being in the mar­ket, just like there’s real risk every time you get in a car. But the answer isn’t to nev­er dri­ve. The answer is to buck­le up.

You accept the risk. You take pre­cau­tions. You fol­low the rules that give you the best chance of get­ting where you want to go in one piece. What you don’t do is leave the car in the garage for­ev­er because some­thing bad might hap­pen.

That’s not pru­dence. That’s just being stuck.

Far more mon­ey has been lost by investors wait­ing for the all-clear than by investors who stayed in, pro­tect­ed them­selves as best they could, and let the sys­tem do its job.

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QAV Myth Killers is a week­ly col­umn in the QAV newslet­ter, tak­ing apart a piece of
invest­ing con­ven­tion­al wis­dom. Read the series, or
get it by email every Fri­day.

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