Buying With What?

Whenever you read or hear an investor crowing that "valuations are the lowest we've seen in years, we're buying bargains everywhere"--and if you're like me you're hearing this a lot--ask yourself "Buying with what?"

There is an enormous difference between the investor who was fully invested going into the crisis and is currently selling stocks (that have almost certainly gone down) in order to buy bargains, and the investor who held cash, or maintained spare borrowing capacity, or had in place a disaster hedge going into the crisis and is now deploying that capital to buy bargains. 

It's not really a bargain if you have to pay for it with realized losses on other investments.

I hope to develop this into a longer post on asset allocation soon.

Comments

[vbierschwale:]

Not really sure that I understand this one.

A prudent investor would have gotten out when each of his stocks had declined 10% from the highest point that they reached while owned by this investor, thus being in cash and ready to invest in future potential investments.

Virgil
www.KeepAmericaAtWork....

2008 Oct 26 08:55 AM

[Joyful Alte...:]

Virgil, few people are prudent investors. Our author is contrasting your prudent investor against those who have available to invest only what they got by selling the remains of their stocks that crashed.

2008 Oct 26 01:34 PM

[investor88:]

A lot of assumptions are being in the article like "bargains" [are they?] "held cash and now looking to deploy into bargains" [are they bargains or wealth destroyers? is whatever cash left enough for survival in a prolonged recession never mind bargain hunting?]. Good luck.

2008 Oct 27 02:06 AM