Should value investors hold a full position or stay in cash?

Do value investors need to hold an empty position? Or should they always be fully invested? I want to clarify a concept.

The so-called empty position means you are holding cash.

Do you think holding cash yields greater returns or involves less risk than holding stocks? Cash and stocks are just two forms of asset wealth,

You are simply comparing which form of wealth will give you higher returns.

Conversely, being fully invested means,

You believe that holding stocks will give you higher returns in the future,

And involve less risk.

If you are always fully invested with no cash,

Then when the safety margin appears,

You might miss the opportunity to buy.

Even if the opportunity arises,

You may lack the capacity to seize it.

Holding cash also has risks,

Such as an annual inflation rate of 3% or a few percent,

Or depreciation pressure.

The risks of stocks might be somewhat greater,

Though perhaps very small.

In a bull market,

When everyone overestimates,

The risk could be relatively high,

Depending on the stock market.

Most importantly, the psychology of the holder can develop issues,

So investors need to do some mental preparation,

Just like preventing infectious diseases and illnesses.

When you are not buying stocks (empty position),

You worry that stocks will rise,

And experience a fear of missing out,

Which is also a form of risk fear.

Conversely, being fully invested,

You worry about a decline,

Having a large position means,

A small drop could lead to significant losses,

So you fear a decline.

This fear may have nothing to do with the future,

Because you are already at the extremes of empty and full positions,

Which can cause psychological issues,

And this is something we need to prevent and guard against.

In fact,

We should forget about the so-called human-made concepts of empty and full positions.

Because true value investors,

Empty and full positions are actually natural outcomes.

For example, when you want to buy a stock,

You should look at whether it has a safety margin.

If it has a safety margin, buy it,

Later, if the stock rises too high,

And you feel it’s unsafe,

Sell it.

You might hold several stocks this way,

Each with its own ups and downs.

Follow the same principle: buy within the safety margin,

But when holding,

You don’t necessarily need to stay within the safety margin,

Because good stocks tend to keep rising during the holding period,

As long as the rise isn’t too crazy,

You should keep holding them.

The requirements for buying stocks are different from holding stocks,

Buying requires a safety margin,

But during holding, you can keep owning them.

Because good companies are rare to find,

Once bought, don’t casually give up.

Because giving up involves a huge risk of missing out,

And that’s very dangerous,

But all these are natural outcomes.

Empty and full positions are a concept related to overall capital.

Within your total funds, you hold different stocks,

Each stock should be sold when appropriate,

And bought when appropriate,

Don’t always think in terms of overall position sizes.

That’s why I say forget about empty and full positions,

Because if you have these concepts,

Your psychology will fluctuate,

Fearing missing out when empty,

And fearing a decline when full.

These distract your attention,

Your focus should be on your circle of competence.

With a circle of competence,

You will understand the safety margin,

And valuation,

And whether to buy or hold,

Whether valuations are too high,

And whether to sell.

You should focus on this,

Rather than on the concepts of empty and full positions.

In a bear market,

When stocks are falling, you might be fully invested with no cash.

Most stocks could be below the safety margin,

And you can compare opportunity costs,

For example, Stock A might have a larger safety margin than Stock B,

And you might be holding Stock B.

At this point, even if you have no cash,

You can choose to sell Stock B,

And buy Stock A with a larger safety margin.

Of course, there are other considerations,

Maybe Stock B has higher growth potential in the future,

And you shouldn’t sell it.

Valuation actually accounts for growth potential,

And the safety margin is a universal concept,

The core is intrinsic value,

And intrinsic value itself includes growth.

I may discuss later how to evaluate valuation,

And what role growth plays in valuation.

Overall concept: In a bear market, even if you are fully invested,

You can still rotate your holdings.

If a new investment opportunity arises—one with a larger safety margin than your current stocks,

You can sell what you have,

And buy stocks with a larger safety margin.

During the upward trend of holdings,

Don’t demand “always within the safety margin,”

Don’t be too strict.

Because during holding, you don’t need a safety margin,

As long as the stock isn’t rising too wildly,

You should keep holding.

Only when you are using funds to buy,

Do you need the concept of a safety margin.

To sum up,

Try to avoid the human-made concepts of empty and full positions,

This can help prevent some pitfalls of missing out and fear of decline.

Empty and full positions are actually attitudes toward two forms of wealth,

That is, attitudes toward the risk of cash and future returns,

And attitudes toward the risk and returns of stocks,

And the current risks versus future returns,

These two need to be compared.