12 years of Christmas .....
Two Lessons in Investing: Liquidity and Permanency
Lesson 1: Liquidity
Liquidity for expenses
Investment axiom: "Always invest what you can to afford to lose."
BUT, how many retail investors have discipline for this?
When chasing the Bull market, it always look silly for any extra cash to be rotting in the bank earning tiny returns. The lure of the Bull will be so strong that we will soon begin to deploy these extra cash "temporary" into the market.
We will know how to take them back soon.
The moment we have accepted the truth and overcome our self-denial. It is often too late. Big negative returns are locked once we have liquidated our investment at market low or near market low
In Jan 2009, Uncle8888 finally realised the liquidity for expenses issue and accepted the "truth" that the daily bombardment of Great Depression 2.0 news might be real.
What about losing his job? Living expenses. How???
What about his two kids university fund starting from Jul 2009? Taking a gamble???
He bited the bullet and liquidated them at big losses to maintain Liquidity for Expenses and locked in negative returns. Painful lesson learnt when market recovered two months later.
Never, never invest money that may be needed in few years even when the Bull Market is running fast!
Risk is the permanent loss of capital and not price stock volatility. We really cannot take stock price volatility anymore when we really need the money soon.
What Warren Buffet said is so right!
What is risk? The conventional definition of risk in finance literature is price volatility. But to super-investor Warren Buffett, risk is the permanent loss of capital.
Lesson 2: Permanency of staying invested at all times
Market volatility is something we as investors have to live with it across market cycle of Bulls and Bears.
It is hard for us to exactly time the market to execute meaningful and significant Exits and Entries of our positions in the market.
But, we must always remember that for every 365 days of Liquidity of Cash in the bank; we are eroding the value of these idle cash at the rate of inflation.
Over long-term can we afford to lose them to inflation???
Permanency of staying invested to fight inflation.