When investing in the S&P 500 (or other market), you are subjecting your cash to the daily volatility of the markets and the annual swings driven by fear and greed. That sounds great when the markets are rising, but terrible when they are falling.

Imagine that your perfect opportunity comes along – and you have 5% less cash to invest because you decided to invest in the markets while you waited. Let’s further assume that it took two years for the price to reach the intrinsic value, and that you would sell at 90% of intrinsic value.

After two years, you would have 5% less money than if you had not played the market game and instead waited in cash or other secure, interest-bearing, “safe” vehicles.

If you know that you won’t be putting cash to work in individual companies for a few years, you can consider putting that money in an index fund. Still, if you are going to risk it at all in the market, and if you eventually want to own individual companies, why put it to work in the index fund?

Food for thought.

By the way, I’m not trying to challenge the knowledge of Joe or you, Giggsy. I’m really just thinking out loud and trying to get a handle on all of this stuff before I take the plunge into equity investing. So feel free to tell me I’m wrong…my feeling won’t be hurt.

-Ryan

Think of investing in terms of risk-reward – The reason Joe uses a discount rate of 15% is becuase that is the returns he seeks but he also gives himself a MOS of 25%+. This is for the risk premium (I am getting to the point).

Let say you have identified a powerhouse company that you know will give you the return you seek. But its priced either at or above your calculated IV and you are not getting your required MOS. Also there are no other companies that you can invest to get your return.

What you do (and Warren) does is wait patiently for the market to hand it to you. Of course you do not want your cash sitting aorund and not earning anything, so you find a short term vehicle (high savings account etc) that is safe and will provide reasonable return.

Remember the market is unpredicateble. What happens if the market gives u an opportunity to invest in the wonderful business and your cash (ex:5000) is sitting in an index fund waiting for deployment. One of the reasons that you are getting this opportunity (to invest in this great company) maybe is that the markets are down hence the index fund is down. Your original saving of 5000 is now worth less hence you are not able to invest the whole amt. You may get lucky and the markets are up and you now have more than 5000.

Question is do you want to risk it?

Sorry for getting kinda long winded.

If you are waiting to swing big, do not loose the bat (Warren & Munger say it bettter).

Giggsy

Henrik Soke,

http://www.activeinvestorsblog.com/

Great question. Whether buying an entire business or part of a business (through stocks), the principals are the same.

When you invest in stocks, you should invest as if you are buying the entire business and your future depended entirely on that one business. When you look at investing like that, it puts the stock market in a whole new light.