Wait for the real bargain

Investors are often too eager to invest surplus funds. Unless the funds are being drip fed into a tracker, it would pay to be patient and stay in cash till a real bargain is available. Jumping in and out of shares handicaps your performance not only because of the trading costs but also because of increased probability of suffering losses as a result of the impatient purchases of shares that research would have revealed to be not real bargains after all.

Markets price shares correctly most of the time, based on the available information. If you think that a share is a bargain at the market price, the chances are that you have not researched the share sufficiently. On further research you will usually find that "cheap" shares appear to be bargains because there are good reasons. They probably have higher risks and / or lower growth prospects than you had initially assumed.

The time that you are most likely to find bargains is when there is huge uncertainty. For example, at the time of writing, no one knows how much the eventual costs will be to Barclays for their exposures to sub-prime mortgages, CDOs, warehoused leveraged finance debt, etc. In hindsight, Barclays may prove to be a bargain. However, it is also possible that even the current relatively lowly rating of Barclays may not be low enough.

Here's what successful professionals have to say about it:

Warren Buffett

• The market is reasonably efficient much of the time.

• In an investment lifetime it’s too hard to make hundreds of smart decisions. We adopted a strategy that required our being smart – and not too smart at that – only a very few times. Indeed, we’ll now settle for one good idea a year.

• Our stay-put behaviour reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.

• If we lack the ability to estimate future earnings — which is usually the case — we simply move on to other prospects. 

• We have never forgone an attractive purchase because of the macro or political environment, or the views of other people. 

• I have been through at least half a dozen periods when people think they're never going to get a chance to buy securities at sensible prices. It always changes. 

Gerald Loeb

• The bargains are not available except occasionally. The opportunities will not be available when securities are generally popular and eagerly bought. It should be axiomatic that the successful investor will keep his capital idle in times of popular over-investment and over-confidence. He will be sorely tried at times when profits and income are seemingly easy to procure.

• I consider myself very lucky if once every year or two I can find in conjunction all the elements that make for an ideal stock purchase.

• It is true that cash has lost purchasing power … but at a very slow rate compared to the rapid depreciation that can be suffered in a real stock market decline.

• Willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle for investment survival.

Jim Rogers

• One of the best rules anyone can learn about investing is to do nothing, absolutely nothing, unless there is something to do.

Peter Lynch

• When in doubt, tune in later.

• If you can’t find any companies that you think are attractive, put your money in the bank until you discover some.

• I’m not saying that you can wake up today and look around and the average person is going to find a good stock. Maybe once every year, or once every two years, or maybe once every six months you want to be able to find one of these.

Charles Ellis

• Make fewer and better investment decisions.

• Quoting Tommy Armour (tennis coach): (i) Simplicity, concentration and economy of time and effort have been the distinguishing features of the great players’ methods, while others lost their way to glory by wandering in a maze of details. (ii) Play the shot you’ve got the greatest chance of playing well.