Predicting rain doesn’t count; building arks does
– Warren Buffett
This saying of Warren Buffet is based on the Genesis story of Noah and his ark. In story, Noah did not know when it was going to rain, and when there would be an obliterative flood. He just knew that it could possibly happen, and therefore, prepared for it. So when the floodwaters came, he and his family, plus all the pairs of animals were saved from being wiped off the face of earth.
Buffet has indirectly compared this with investing somewhat; by predicting when the market will fall, how much it will fall, how much oil prices will fall, or how will the global economy perform next year… they don’t really help us improve our investment all that much, because predicting things is an imprecise and difficult task.
The things that we do know is that stock market has its own cycle -if the market has risen way above its true value, then one day, it must fall.
Therefore, the important thing to do is not to try and predict when the market will fall, or how much will it fall, but to be ready in situations where there are risks of something bad happening. To be prepare combatting strategies, and know what measures to take.
When we are mindful and ready for these situations, we will be able to make logical decisions -not get swayed by Mr. Market, and instead look for opportunities from him.
Here are what investors should do when they feel that the market is way more expensive than what it should be:
- Lower their use of margin in investing
- Make their portfolio stronger by trying to hold only stocks that they can positively predict whose revenue and profit will not decrease in 3-5 years. These companies should also have a healthy cash flow and low debt levels (even better if they are able to pay dividends every year).
- Sell stocks of companies that have weak businesses or stocks whose prices are much higher than their actual values.
- After having sold stocks, if there aren’t any good stocks with suitable prices, then we can also hold on to the cash first. However, if there are good stocks available (as mentioned in #2), then we can invest in them. Because these stocks can weather bad times, and when the storm passes, their prices will bounce back even higher than before.
- Study and research thoroughly. Prepare a list of good stocks we would like to own for the rest of our lives, so that one day when their prices fall below their suitable value, we can immediately invest in them.
To put it simply, try to hold on to stocks that make you feel comfortable, even if the stock market closes down in the next five years. And prepare some cash for future investing opportunities. That’s all you need to invest happily.
As for anyone who wants to evaluate the strength of their own portfolio, you can do so using the Jitta Portfolio, and see the Jitta Score / Jitta Line of the port, in addition to Asset Allocations on the bottom. I believe that these tools will give you a clearer vision of your portfolio and help you prepare strategies for different situations more effectively.