Reacting vs Responding

A couple of months back, a friend and fellow investor asked if investors should rotate to hoard cash or remain invested/ buy more amidst these volatile conditions?

The long answer to that is investors should consider to:

  1. Increase funds (new sources),
  2. Reduce stakes in relatively high valuations companies,
  3. Increase stakes in relatively low valuations companies and
  4. Maintain/ increase cash position, in this orderly fashion.

Over the past two weeks, news and media started sharing more perspective of where the current market stands, and I’d like to share these with you:

Source: Bloomberg
Source: Socia Media

The first chart shows how the economy is growing well, with unemployment rate at historical lows and inferred future inflation (by the very virtue of employees having more wages to spend and further boosting the economy and prices of goods and services), which are usually good reasons for the federal reserves to increase interest rates to curb inflation before they go out-of-hand, which then sparks the beginning of falling asset prices, historically speaking.

The second chart is more light-hearted and is perhaps coincidental rather than tangible or of any significant meaning. But the dark sense of humour may have some slight truth particularly when put together with the first chart and the other long-term data points. All seem to be pointing to the same inevitability.

Hence, in my opinion it is ever more critical to focus on high quality businesses with scalable growth, run by honest management, and invest in them at low valuations.

How the economy react is significant, but how we choose our investments is critical. Especially in the long run.

The scary thing is that some of these companies might be consolidating to prepare for future growth, and hence market participants might be hammering their prices down in the short term.