“You don’t make money when you buy stocks. You don’t make money when you sell stocks. You make money while you wait.” – Charlie Munger
Most of the time, successful investing is a waiting game. Just as there are poor times to sell your stocks, there are poor times to buy them as well, and sitting on money (cash) while you wait for a better opportunity is often one of the best investing decisions that you can make.
At a time when most investors – encouraged by the strength of the market – are pouring money into the stock market at an unprecedented rate, I personally am sitting on the sidelines waiting until the next stock market crash.
Outlined below are the reasons why I’m waiting for the next crash before investing heavily, as well as why I believe that I won’t have to wait very long.
1. The Current Market is Overpriced
There are a range of factors that have led to an enormous surplus of cash flowing into the US stock market.
First and foremost is the optimism surrounding its current strength, which has encouraged investors to ignore the high valuations and put increasingly large amounts of their money into the market.
Other factors leading to a ton of money in the market (and thus overpriced valuations) include a lack of attractive investment options elsewhere, index investing which drives up companies across the board rather than just those that are performing well, and US policies such as tax reform which have encouraged individuals and companies alike to put more money into the market.
The result of all this money in the market is enormously high valuations which make it difficult to find a company with a good margin of safety.
As Rule #1 investors, we try to invest in companies that have at least a 50% margin of safety, meaning that there is at least a 50% upside between the company’s stock price and its true value.
When valuations are as high as they currently are, though, it becomes difficult to find any quality companies that exhibit this margin of safety.
Prices are so high in the market right now, according to the Shiller PE prices have only been this high twice in the past 140 years. The first time they got this high was in 1929. The second time was in 1999.
We won’t be here long…
2. The Best Investors are Staying on the Sidelines
Following the smart money – defined as money from big-time investors who know the market better than anyone – is rarely a bad idea, and right now, these investing gurus aren’t putting a lot of money into the market.
Instead, the majority of the money flowing into the market right now is coming from retail investors.
Retail investors are everyday individuals who purchase stocks for their own account rather than buying them for a big corporation.
Most of these retail investors will have a limited knowledge of the market compared to investment professionals, and they have a tendency to jump on board when optimism is high and valuations are even higher.
Though their individual spending power may not be as high as big-time investors, their collective spending power is much higher, driving the market up to the high valuations we currently have.
While these retail investors are buying stocks faster than ever before, the smart-money investing gurus are sitting on their cash. This alone is a pretty good indication that right now is not the best time to buy into the market.
3. A Crash is an Excellent Opportunity to Load Up on Businesses You Love
Stock market crashes are not always negative things for investors. In fact, if you have a lot of your money in cash, crashes can present the opportunity of a lifetime.
Throughout history, the bear market following a stock market crash has rarely ever persisted for more than a year or two at most before another bull market follows it.
Meanwhile, bull markets often last for many years. This means that if you are able to buy a bunch of great companies at a low price following a crash you will likely be in for many years of gains.
If you have all of your money in the market before a crash, though, you won’t have any cash available to buy cheap stocks following a crash.
This is why sitting on your money and waiting for a crash when valuations are as high as they are right now can be a very effective investing strategy.
As Rule #1 investors, we like to find companies that are solid enough to survive and thrive no matter what the market does. When a crash such as the one that is very likely on the horizon drives the price of these companies down, the opportunity for great returns is higher than ever.
Will the stock market crash? What are you going to do if it does? This Stock Market Crash Survival Guide will help you prepare for the next market crash and help you cash in when the market drops!
P.S. If you’re researching stock market investments, review these resources first: