Tuesday, October 14, 2008

Bull vs Bear, the cash/asset paradox

During a bull season, those who already hold assets reap big time. This is not limited to specific assets but applies to diverse assets such as:
1. skillset/qualifications that you have because during a bull season, there will naturally be a scarcity for those skills
2. raw resources because economies grow/expand and consume more of all kinds of resources

3. shares, properties and more liquid forms all rise

During a bear season, those who hold cash plant big time as they are able to pick assets at throw away prices literally. So the paradox is essentially that during a bull, you have to amass cash and during the bear season, you have to buy up assets.Translated correctly, you have to get out of the bull at an opportune moment and effectively keep that cash handy for when the bear comes along. Hence WB's famous saying about being greedy when others are fearful (i.e. during bear) and vice versa. It does mean that;
  • a successful investor needs to be able to spot the peaks and troughs
  • in which case, selling off and running away from the bearish markets is counterproductive because it means you can't spot the turning pts
  • a better strategy is say if you have a particular portion that you set aside for saving and investing, you half or say go to a 1/4 of this portion as investing amount. You therefore keep tabs on the market and have the cash you'll need when the bear hits the trough
  • spread your buying during the bear season and only invest one-off lump sums during the bull

1 comment:

Maishinski said...

The theory and strategies are well known.

However, when it comes to implementation... shida mingi!