There has been an ongoing talk more on warchest recently from fellow friends and bloggers following Derek's and LP's initiated conversation the other time regarding portfolio allocation. The truth is portfolio allocation is seemingly a very important yet overlooked concept that many had underestimated.
I've been reading some articles and books on human behaviors in recent weeks myself which I felt was somewhat intrigued and would like to share my thoughts on the subject matter.
I've been reading some articles and books on human behaviors in recent weeks myself which I felt was somewhat intrigued and would like to share my thoughts on the subject matter.
As someone who had invested in the stock market myself and coming from the retail investor point of view, I have come across similar situations and experience that many other retail investors have come across or newbies that will come across someday. The subject matter in this article is about how continently difficult it is to keep cash as a warchest given the various scenarios based on my past experience.
A Newbie’s Behaviour
Everyone that has done some sort of investing was once a newbie at start so I’m pretty sure most would be able to relate to this experience.
In recent times, I see many new comers asking about directions on how to start investing, what knowledge do they need to get started, which online brokerage offers the lowest commission rate, which trading platform is the easiest to navigate, which blue-chip stock to pick, which investing strategy to apply, etc. These general queries have mostly been answered by more experienced investors with some common consensuses – i.e You will need to start reading financial statements, understand the various financial ratios, do your own due diligence, learn from fellow peers, pick some government backed blue chips in the STI index, keep some warchest and diversify.
I’ve seen these responses a lot and I remember getting roughly the same advice when I started investing.
Interestingly, when a new investor (and I am culprit of this myself) entered the market for the first time, an enormously high level of energy seems to surround them that keeps them bullish for a long period of time. Most of the times, their investing behaviors will be subject to crowd herding, i.e they will forget every basic fundamental advice they have been given from the start and hurriedly enter the market without preparing for it sufficiently. Similarly, any amount of money that is meant for warchest would be deployed into the market without thinking prudently of the consequences. Sometimes, you just need to learn from the callous market behaviours itself, pay some tuition fees and do better next time.
An Allocator’s Behaviour
As financial bloggers, we usually do not understand some of our friends' shopaholic behaviours and why these people chose to spend their hard earned money into some useless de-fashionable clothes and gadgets. The truth is we might be seeing the same reflection through similar lenses ourselves.
I have personally known many friends who are not able to control their behaviours when it comes to purchasing shares. Whenever they have a new capital available, either from their salaries or dividends, they would deploy the available capital straight into the market buying new shares, regardless of valuations. It is the same addiction we see in many shopaholics that we often lament about and sigh, only in this case the end product is not the same.
An interesting observation shows that these people are actually poor controller of capital. Some people just could not resist the temptation of any capital available inside their bank. They are afraid that they would be tempted to spend these available money on items that they should not be spending on. This is the same reason why there are many investors who started investing without having a required emergency funds that they should be putting as priority.
A QE’s Behaviour
Massive monetary easing policies across the world have kept interest at a rate near zero for the past few years. With interest rate lingering at zero rate, it seems foolish to keep cash compounding at zero rate for several years. As a result, we are seeing a lot of liquidity in the assets market encouraging investors to put in more capital into a full-blown assets that have grown bigger each day.
While the above statement is not incorrect, I have a feeling that this is becoming sort of a lazy excuse for many investors to justify themselves investing in assets that has seemingly grown to a level that is somewhat overvalued.
Because of this, these investors failed to see the value that cash can play as a back-up option should things go south. Instead, they insisted on pumping more and more capital to earn the return that generate better than what the other alternatives, i.e bank, bonds are currently offering.
Final Thoughts
Some things like warchest strike to me as being similar to taking things for granted in our daily lives.
When times are good, we don’t miss them. But when times are bad, we wish we could rewind back those times to have more of them.
Sadly, most people learnt their lessons through the hard way. As Seth Klarman said in his recent letter, preparing for a market correction or bear market does not mean that we are hoping for it. It just means that as an investor we have taken calculated risk in trying to justify our returns. Similarly, keeping a warchest is akin to taking a calculated opportunity costs in trying to justify defending our positions.
What about you? What is your experience that you see people having issues with warchest?
