Tuesday, March 10, 2015

My Experience On The Issues Of Warchest‏

There has been an ongoing talk more on warchest recently from fellow friends and bloggers following Derek's and LP's initiated conversation the other time regarding portfolio allocation. The truth is portfolio allocation is seemingly a very important yet overlooked concept that many had underestimated.

I've been reading some articles and books on human behaviors in recent weeks myself which I felt was somewhat intrigued and would like to share my thoughts on the subject matter.

As someone who had invested in the stock market myself and coming from the retail investor point of view, I have come across similar situations and experience that many other retail investors have come across or newbies that will come across someday. The subject matter in this article is about how continently difficult it is to keep cash as a warchest given the various scenarios based on my past experience.

A Newbie’s Behaviour 

Everyone that has done some sort of investing was once a newbie at start so I’m pretty sure most would be able to relate to this experience.

In recent times, I see many new comers asking about directions on how to start investing, what knowledge do they need to get started, which online brokerage offers the lowest commission rate, which trading platform is the easiest to navigate, which blue-chip stock to pick, which investing strategy to apply, etc. These general queries have mostly been answered by more experienced investors with some common consensuses – i.e You will need to start reading financial statements, understand the various financial ratios, do your own due diligence, learn from fellow peers, pick some government backed blue chips in the STI index, keep some warchest and diversify. 

I’ve seen these responses a lot and I remember getting roughly the same advice when I started investing.

Interestingly, when a new investor (and I am culprit of this myself) entered the market for the first time, an enormously high level of energy seems to surround them that keeps them bullish for a long period of time. Most of the times, their investing behaviors will be subject to crowd herding, i.e they will forget every basic fundamental advice they have been given from the start and hurriedly enter the market without preparing for it sufficiently. Similarly, any amount of money that is meant for warchest would be deployed into the market without thinking prudently of the consequences. Sometimes, you just need to learn from the callous market behaviours itself, pay some tuition fees and do better next time.

An Allocator’s Behaviour 

As financial bloggers, we usually do not understand some of our friends' shopaholic behaviours and why these people chose to spend their hard earned money into some useless de-fashionable clothes and gadgets. The truth is we might be seeing the same reflection through similar lenses ourselves.

I have personally known many friends who are not able to control their behaviours when it comes to purchasing shares. Whenever they have a new capital available, either from their salaries or dividends, they would deploy the available capital straight into the market buying new shares, regardless of valuations. It is the same addiction we see in many shopaholics that we often lament about and sigh, only in this case the end product is not the same. 

An interesting observation shows that these people are actually poor controller of capital. Some people just could not resist the temptation of any capital available inside their bank. They are afraid that they would be tempted to spend these available money on items that they should not be spending on. This is the same reason why there are many investors who started investing without having a required emergency funds that they should be putting as priority.

A QE’s Behaviour 

Massive monetary easing policies across the world have kept interest at a rate near zero for the past few years. With interest rate lingering at zero rate, it seems foolish to keep cash compounding at zero rate for several years. As a result, we are seeing a lot of liquidity in the assets market encouraging investors to put in more capital into a full-blown assets that have grown bigger each day.

While the above statement is not incorrect, I have a feeling that this is becoming sort of a lazy excuse for many investors to justify themselves investing in assets that has seemingly grown to a level that is somewhat overvalued. 

Because of this, these investors failed to see the value that cash can play as a back-up option should things go south. Instead, they insisted on pumping more and more capital to earn the return that generate better than what the other alternatives, i.e bank, bonds are currently offering.

Final Thoughts 

Some things like warchest strike to me as being similar to taking things for granted in our daily lives.

When times are good, we don’t miss them. But when times are bad, we wish we could rewind back those times to have more of them. 

Sadly, most people learnt their lessons through the hard way. As Seth Klarman said in his recent letter, preparing for a market correction or bear market does not mean that we are hoping for it. It just means that as an investor we have taken calculated risk in trying to justify our returns. Similarly, keeping a warchest is akin to taking a calculated opportunity costs in trying to justify defending our positions. 

What about you? What is your experience that you see people having issues with warchest?


  1. Hi B,

    I learned the hard way and I did it on purpose. I called this a manageable mistake. E.g. telling a child that the fire is hot will not stop him so put his finger into it and let him experience the pain. It is better than getting his entire body burnt ya. Similarly when people were chasing after stocks I followed them with a small amount - an amount I'm prepared to lose all.

    I'm glad to have been through the sub prime crisis. I'm now able to better control my 'itchy fingers'.

    1. Hi Derek

      Thanks for sharing.

      It's a good analogy of feeling the pain yourself to feel it rather than watching empty voices flying around the air without feeling anything.

      As long as one stays invested, we will experience and undergo the correction ourselves one day. Some will be more hurt than the others in their virgin experience.

  2. B,

    Somethings we have to experience it ourselves....

    No amount of words can describe the moment of ecstasy when we touched snow for the first time ;)

  3. Hi B,

    Good article on having a war chest.

    The issue of chasing returns is actually not a new one; it's just been horribly amplified and exacerbated in the current low interest rate environment. Traditionally, money has always flowed to the assets which generate the highest perceived returns, which has the effect of pushing prices up to unsustainable levels. Note the word "perceived" - people put their money into assets which they THINK can generate the best returns for them, but the irony of the situation is that the more money pours into such assets, the lower the potential future returns as the price of the asset gets inflated beyond what fundamentals can justify.

    So here you see a situation where a lot of money is chasing very few "good" assets, and where everyone agrees (consensus is obviously a comfortable situation to be in) that the assets they own are undeniably the best. Therefore, you get pockets of severe neglect within the overall market which would imply that the boring but steady companies are chronically under-valued.

    I think you probably get my message by now - such an extended period of low interest rates creates distortions which are almost impossible to correct. Even with a rise in interest rates, there's no guarantee that the bubble can or will burst. Living through the GFC was useful but apparently, we are seeing the same situation build up all over again.

    Having a war chest at ALL times is essential, since you never know when the market will crash around you. But one does not need to constantly sell and hold cash and make frequent asset allocation decisions - if one is a salaried employee, one simply needs to sock away some cash into a bank account and use that to grow his stash. Of course, dividends help as well.

    So the way I see it, asset distortions are common-place; but it would take a very severe disruption in the economy (or some say space-time continuum) for the distortions to disappear and for sanity to return to the stock market.....

    1. Hi MW

      Thanks for your input and comments.

      Actually, circumstances have led many to react this way. When alternatives are offering very poor returns, it clears the path for stocks to be the number one investment and it will cause an inevitable bubbles one day until we start all over again.

      As the portfolio gets bigger, I think my risk appetite has also started to change and I am now a bit more wary than when I started years ago. Maybe I have learnt something from it that changes my perspective or maybe it's just the fear factor that everyone is talking about. Regardless, we'll see how we can respond when we face a big bear market when the time comes.

  4. Hi B,

    the problem most people have is tend to focus on others and not themselves. We see people do this and that and we start to comment that they are "right" or "wrong" or I will not do this if I were them.

    I always believe you must first truely understand yourself and know what exactly you want as first priority!

    so hehe.. I have no problem with their problems of others having a warchest...

    as for warchest.. this word also literally means money ready to fight a war.. haha I do not go war... so better not have a warchest but a bank account or cash that I can readily have my money... haha just kidding..

    anyway I am building up my warchest now which is good thing.. not because I am planning but because I am too busy to look at stocks lately... hey but in fact the lesser time I spent on my portfolio ... Sometimes the better they perform.. Hahhaa...

    1. Hi Rolf

      I’ve actually seen more frequent buying advisers in forum than focusing more on one’s own portfolio.

      Again, it’s easy to do that when you are in bull market when everyone thinks like a genius but once it starts crawling down, you start to be in denial where you think Heck, I am in it for a long term so it doesn’t really matter anyway.

      It’s good to see that you are not very actively monitoring the portfolio yet able to reap gains from it. As a matter of fact, very frequent monitoring may not be a good idea because you will face a lot of denial/acceptance dilemma on a daily basis when you do that.

  5. Actually I think it's hard for one to gauge whether the stocks are over-valued or not. So for people lacking in valuation skills like me, we tend to value average into stocks whenever we get our salary.

    Of course having a war chest would be ideal!

  6. Hi BFGF

    If that's the case, wouldn't it better if you invest in ETF on a DCA basis?

    That way, you take out a lot of unnecessary factors that can only be bad to you.

  7. Great read :) The warchest and portfolio needs to be thought through carefully , don't anyhow hantam ;)

  8. B,

    Great read!

    Personally I don't really have a war chest, even though I have quite a lot of cash on hand. The cash is not meant for stock purchases, but if the markets were to decline dramatically I probably would put it to work.


    1. Hi NMW

      Is your cash meant for emergency purpose?

      If not, I guess we can classify that as alternative cash to be put in use for warchest ;)

  9. Hi, have a question to all. How much % of portfolio should be in cash/cash-like investments (your so called "war chest")? 20% 40%? Thanks.
    - momo