Holding Cash Equivalents
Printed From: The Equity Desk
Category: Market Strategies
Forum Name: Fundamental
Forum Discription: Discuss the operations and finances of any of your companies.Make the other participants aware on the investment opportunities available in a stock on PE free cash flow etc
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=1626
Printed Date: 19/Apr/2025 at 5:56am
Topic: Holding Cash Equivalents
Posted By: snehaldani
Subject: Holding Cash Equivalents
Date Posted: 25/Feb/2008 at 2:16pm
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Originally posted by Deveshji :
" Snehal jee's explanation of Cash equivalents made a lot of sense and i would request him to explain it to TEDdies."
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Thanks for the nice words. Sorry for picking up the tab a little late as I was travelling.
" Holding Cash Equivalents " is a loose term coined by me as a semi defence strategy to protect oneself in the times of market mayhem and also to selectively go for bargain hunting when the markets are falling.
As a die hard long term investor will know that typically , he has a list of his favourites where he expects superior returns and which one goes on accumulating at prices which one considers reasonable. There is a broad threshold below which it is normally unthinkable for a devotee to expect the price of his favourite to fall .
However, in times of panic, which always comes without warning and sudden and swift, even the prices of one's favourites come falling down to extremely attractive levels. A die hard believer of a story would possibly at such a stage may have the guts to go against the current and buy but typically, at such times, he is fully invested and hardly has additional cash to invest or the one that he has, he has already used and more opportunity is available.
Typically, an investor hardly has 3/5 % cash in his portfolio unless he has been expecting a major correction , in anticipation of which, he has already converted a significant % of his portfolio to cash. The limitation of this approach is that it demands timing the market and that, as all of us know, is extremely difficult for a fundamental analysis guy. So any cashing out in anticipation of a fall also could result in loss of significant upward opportunity.
To partly mitigate the above, what one can do is : Invest may be, 10 % of one's portfolio in high value, high eps, low pe, good dividend , stable stocks which are , although not very liquid nor have sterling growth, do provide significant protection from the downward risks even in a falling market and holdings of an individual ( by virtue of small size as contrasted from the holding of an institution which has to dabble in bigger quantities ) can be absorbed even in a falling market at relatively less damage in percentage terms than the market fall percentage.
By virtue of such stocks, the overall performance of the portfolio will definitely get muted a bit but they provide an opportunity to protect oneself when the market is falling like nine pins. Some of the stocks which may qualify to be in the category of Cash equivalents could be either MNC stocks ( particularly in the field of FMCG/pharma/auto consumable/accessory ) like HUL, Nestle, Glaxo Smithkline, Castrol , MICO or they could be rock solid stories like HDFC or even some small size value companies which one has spotted.
On the day of market upheavals, one can cash out of such quasi cash shares at reasonably less damage compared to market erosion and use such cash to fund bargain basement purchases of one's favourite.
To illustrate, on 22nd January, on the day of the crash and for next 2 consecutive days, I went on selling Ipca pharma shares at hardly any damage to its pre fall price of 700 and converted the procees to fund my purchases of my favourite Kotak bank which had fallen 10 % and went on falling further.
Like any strategy, this strategy also goes with the caveat that in times of extreme upheavals, it may not work. Further, one should be prepared to accept sub normal returns from this part of the portfolio in normal times which would reduce the overall portfolio returns. However, I find it better to hold some of these stocks (about 10 %) and earn lower returns rather than holding cash and earning nil returns or not holding them and miss out on the bargain basement prices. ------------- Snehal P.Dani |
Replies:
Posted By: johnnybravo
Date Posted: 25/Feb/2008 at 2:29pm
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excellent strategy snehalji, To put an analogy, when wickets start falling and we have a 4 wickets 22 runs kind of situation, its for the good that Rahul Dravid walks in and slows the run rate but gives stability to the side. If we expect everybody to be a master blaster in our portfolio, then we might end up getting all out! Just one question: "Invest may be, 10 % of one's portfolio in high value, high eps, low pe, good dividend ..." What do you mean by 'high value' here? ------------- Saab Moh Maya hai! |
Posted By: Vivek Sukhani
Date Posted: 25/Feb/2008 at 3:02pm
Well, I have been doing all these while.......but I will tell you one shortfall of this strategy. If you will ever have stocks of the likes of Nestles, glaxos and Castrols of the world, then encashing will be very difficult.....not because you will not get a decent selling price but in all probability, you will not like to sell them. You simply have to go through their financials to know why I am saying so.....
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Posted By: deepinsight
Date Posted: 25/Feb/2008 at 3:59pm
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Mohnish Prabai - talks of a similar concept calling it a "place holder" in his book- he buys Berkshire Hathaway and keeps is a safe position till he finds something more valuable/undervalued. ------------- "Investing is simple, but not easy." - Warren Buffet |
Posted By: SORUB
Date Posted: 25/Feb/2008 at 5:07pm
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tata investment corporation can be a choice in this catagory ------------- K.I.S.S(keep it simple silly) is the most easy management formula i ever came across!!! but it is very hard to follow!!! |
Posted By: snehaldani
Date Posted: 25/Feb/2008 at 5:39pm
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Originally posted by Johnybravo :
" Just one question: "Invest may be, 10 % of one's portfolio in high value, high eps, low pe, good dividend ..."
What do you mean by 'high value' here? " ----------------------------------------
In this context, "high value " does not mean ranking being high on the paramters of value investment. By high value, what I mean is that there is a lot of real value in the company and the company is also not available cheap in the absolute sense. Typically, these stocks are in 3 digit quotes and not in 2 digits. However, their beauty is consistent earning , dividend distribution, and absence of much speculation in these counters. To that extent, these counters are normally sedate and have high delivery ratios to the total turnover. ------------- Snehal P.Dani |
Posted By: snehaldani
Date Posted: 25/Feb/2008 at 5:45pm
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Originally posted by Johnybravo :
" If we expect everybody to be a master blaster in our portfolio, then we might end up getting all out! "
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Yes, very aptly said. I always say that surviving for really long term and that too profitably in this market is as important as the returns one may earn for a brief spell.
Whenever I have to take a tricky decision in the market in terms of avoiding greed and not surrendering to fear, I tell myself that I have completed 33 succesful years in this market and each of my actions must ensure that I can look forward to being in the market for another similar period .( Provided I live that long ). ------------- Snehal P.Dani |
Posted By: snehaldani
Date Posted: 25/Feb/2008 at 5:56pm
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Originally posted by Vivek Sukhaniji :
" Well, I have been doing all these while.......but I will tell you one shortfall of this strategy. If you will ever have stocks of the likes of Nestles, glaxos and Castrols of the world, then encashing will be very difficult.....not because you will not get a decent selling price but in all probability, you will not like to sell them. "
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Congratulations Vivekji for successfully implementing the strategy of giving some space to cash equivalents in your portfolio as a part of risk containment and stability achieving objective. Further , they enable one ready opportunity of bargain hunting when everything seems to have been lost in the market.
I understand your contention that one does not like to sell some of these cash equivalents but that is where one has to overcome the love for them, be clinical. One has to put them on auction block on D day when the markets are falling like nine pins, these counters are providing valiant resistence to the downfall and certain other favourite counters are available at significant discounts.
One may find even Mungeri trait in this as it involves selling off the winners of that particular day and embracing the losers of the day. However, if one has done his fundamental homework correct and is reasonably confident of the respective valuations that he assigns to each of them and maintains a sense of balance, he should not be confused with a Mungerilal. ------------- Snehal P.Dani |
Posted By: Vivek Sukhani
Date Posted: 25/Feb/2008 at 9:32pm
| Some of the companies whom you call cash equivalents, earn quite big....With me, i wanted them to use them to pad up my returns but gradually they have started to become a major part of my portfolio. |
Posted By: snehaldani
Date Posted: 26/Feb/2008 at 1:30pm
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Originally posted by Vivek Sukhaniji :
" Some of the companies whom you call cash equivalents, earn quite big...."
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Yes, that is an additional bonus.
For some of TED readers who are more comfortable with banking terminology, Cash is like CRR which you need to have but does not give you any return. Cash equivalents are safe heaven investments under SLR which not only do earn normal returns but in times of interest rate softening regime, can give you decent returns by way of capital gains.
However, you do not set up a bank and put money only in SLR. Core business of lending has to happen . Lending, although risky, gives you higher returns.
Similarly, in investing, one cannot only concentrate on safe heavens of cash equivalents. By doing so, blistering growth opportunities in the emerging businesses would get missed out.
What I am suggesting is a fine balance between the two extremes. ------------- Snehal P.Dani |
Posted By: kulman
Date Posted: 26/Feb/2008 at 1:57pm
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Interesting analogy with banking terminology there, Snehal jee. Some terms missing were: NPAs, NIM, NII
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: Vivek Sukhani
Date Posted: 26/Feb/2008 at 3:03pm
In hindi, we have a proverb, "paisa paisa to taanta hai" ( I think rupee should be a better term and dollar can also be used to make it look more spicy). Translated into English, it means, money attracts more money. I dont know, but companies with very strong cash flows have a very superior advantage when it comes to bargaining with vendors(they extract such wonderful cash discounts), with bankers( when the bankers try to get bulk deposits), and most importantly with competitors( they will simply finish off a new entrant with a slew of price cuts in the products). Cash on the balance sheet is one of the most powerful moats a company can have.....
All these things give rise to very small-small but cumulatively they become very important contributors in keeping the margin level very high.
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Posted By: snehaldani
Date Posted: 26/Feb/2008 at 7:41pm
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Originally posted by Kulmanji : "Interesting analogy with banking terminology there, Snehal jee.
Some terms missing were: NPAs, NIM, NII "
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Thank You Kulmanji.
NPAs are investments gone sour in junk or poor quality stocks. Mungerilals have a whole lot of them. NIM is the differential percentage return that one is able to earn on leveraged funds. NII is the same as NIM except that the former is in absolute terms while the latter is in percentage terms.
But unlike Banking, an investor does not need a license and hence a lot of chaos in the markets. This also provides an opportunity to the well prepared. ------------- Snehal P.Dani |
Posted By: adityancs
Date Posted: 28/Sep/2009 at 11:45am
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Should 3/5 cash to be kept or this equivalent money be parked in Debt fund which can be utilised for purchasing additional shares at the time of market crash |
Posted By: hit2710
Date Posted: 29/Sep/2009 at 2:50pm
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Another option of cash equivalents would be buying NCDs listed on NSE of companies like Shriram Transport, or Tata Motors etc. Most of them offer rates above 10 % and the liquidity is better than bank FDs.
------------- Stockmarket is a weird place. For every person who buys a stock there is a person who sells it and both think they are very smart. |
Posted By: snehaldani
Date Posted: 29/Sep/2009 at 6:38pm
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Cash equivalents can be parked in debt funds, as also in some of the listed liquid NCD (s) as suggested. The idea is to have ready liquidity available throughout the year, without foregoing the returns in total. Of course, lower returns will come from these investments but even a once in a 2/3 year opportunity of bargain basement prices could more than make up the intermediate compromise of the returns. Of course, one must be patient to wait for the opportunity for months and years together. ------------- Snehal P.Dani |
Posted By: EquityInv
Date Posted: 29/Sep/2009 at 10:46pm
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Hi All,
Did anybody followed this strategy of "Holding Cash Equivalents" and converted it into big opportunities while market was all time low? If so, can you please share your experience with it. ------------- One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do – James Rogers |
Posted By: basant
Date Posted: 29/Sep/2009 at 11:09pm
I know of several people who converted their equities into cash equivalents when markets were high but could not deploy them at the lows or even higher then from what they had converted. This was a great lesson to the timers and reinforces the concept that it is the time in the market and not the timing that will make money.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: Mohan
Date Posted: 29/Sep/2009 at 12:06pm
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I guess it is better to ride the roller coaster than to stand by and watch it.
------------- Be fearful when others are greedy and be greedy when others are fearful. |
Posted By: hit2710
Date Posted: 29/Sep/2009 at 12:09pm
I had the problem of being fully invested when the market fell and I had my holding in PARAL,LEAF AND TTK PRESTIGE and still I wanted to buy IVRCL at around 60 and I had no more funds and did not have the guts to part with my holdings. No regrets though. All my holdings delivered albeit to a lesser extent. But the lesson I learnt was always to keep 10-20% for that rainy day and if that money does not earn money for me it is okay by me. At the current market PE of around 22 I have started feeling a bit uncomfortable, although my stocks do not have such high PEs, but still when the market corrects, it tends to beat all stocks with the same stick, whether high PE or low PE. It is like power play in cricket, anything goes for a six -- good ball or bad ball. Panic knows no reason. ------------- Stockmarket is a weird place. For every person who buys a stock there is a person who sells it and both think they are very smart. |
Posted By: EquityInv
Date Posted: 29/Sep/2009 at 12:49pm
Basantjee, But big bucks are always made when there's blood in market. so if we remain fully invested in equities all time, how can we trap that opportunies? [while market is in panic]. Specifically in panic situation individual portfolio itself shows horrible and hence people would rarely have guts to put new money [borrowed money or their savings] at that time. ------------- One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do – James Rogers |
Posted By: EquityInv
Date Posted: 29/Sep/2009 at 12:52pm
Hitbhai.. Yes, I too feel that we should keep some % for that rainy days.. Even though it doesn't earn money but while market is in excess panic mode, this money literally pays full time... question is that will anybody be able to invest that 20% of cash in panic mode or it will just remain as cash for ever ? [as Basantjee gave example] ------------- One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do – James Rogers |
Posted By: subu76
Date Posted: 29/Sep/2009 at 9:54am
Hi Hit,
I am very very interested in this strategy.
Is there a way to buy bonds with this "spare" money in the Indian context?
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Posted By: hit2710
Date Posted: 29/Sep/2009 at 10:25am
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Regarding the bonds, yes they are listed on NSE and one can buy just like buying shares. I know of bonds of Sriram Transport and Tata Motors which are listed and are traded on NSE. ------------- Stockmarket is a weird place. For every person who buys a stock there is a person who sells it and both think they are very smart. |
Posted By: subu76
Date Posted: 29/Sep/2009 at 11:50am
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Thanks for this data point Hitesh.
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Posted By: vishmitt
Date Posted: 30/Sep/2009 at 12:01pm
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BTW, Buffett also used this startegy - he sold J&J and P&G to buy attractive picks in the mayhem, as the potential upside was far higher in those. Interestingly, he did not used all cash but sold these defensives, because of insurance business requirements.
http://www.gurufocus.com/news.php?id=50136 - http://www.gurufocus.com/news.php?id=50136
Also, I think that rather than timing the market, pricing the market may turn out to be a better way - keep increasing cash & equivalent as markets keep getting pricier above a threshold.
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Posted By: basant
Date Posted: 30/Sep/2009 at 12:23pm
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I think switching on the basis of valuation would make more sense. For instance if a cyclical and a Nestle all things being equal at a 30% valuation differential should be interchanged and when the market falls we can go back to the cyclical and wait again. I am trying to focus on that strategy of converting cyclical with consumer companies that do not fall like a rock in the ocean when the markets correct. Only time will decide which strategy is correct. I have always been fully invested and hence prefer this strategy so someone can argue as to why a Nestle (just an example) at this time and my defense would be because its valuations isn't so high relative to the cyclical. A 30% jump followed by a 20% CAGR for 3 years generates a return of 30% CAGR! I like working on similar situations of taking some money off a wild stoick and then getting into the stable names. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: smartcat
Date Posted: 30/Sep/2009 at 12:49pm
"High" interest rates can be a pretty good indicator of when the stock market will crash. Don't ask me how high is "high" though.
Extra-ordinary returns cannot be made by "buying and holding" stocks - at best, one can get around 20 - 25% per annum. To get that kicker in returns, one needs to either -
- Dabble in futures and options
- Take leverage
- Time the market.
Since I don't understand futures/options and don't have the guts to take leverage, the last option is my only available bet.
Tried it already in 2006/2007 and failed
This I agree with. But I'm trying to achieve this by not switching but by buying 20% CAGR growth small cap stocks at 5 P/E.
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Posted By: grim
Date Posted: 05/Oct/2009 at 12:01pm
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Hit , Any idea how one can buy/sell bond online, similar to trading equities. icicidirect doesnt seem to allow trading of bond instruments. -G
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