Square

In the bustling world of Wall Street, to be square (or “flat”) is to have no open investment positions. Imagine you've sold all your stocks, bonds, or other assets, and you're now sitting on a pile of cash with no bets on the market's direction—you're not long (owning assets) and you're not in a short position (betting on a price decline). You are, in essence, on the sidelines. While this might sound passive, for a value investor, being square is an active and often powerful strategic decision. It’s the financial equivalent of waiting patiently for the perfect pitch instead of swinging at every ball. It signifies a disciplined refusal to participate when prices are irrational or when no compelling opportunities meet your strict criteria. It’s not about market timing; it’s about price discipline. When you can't find a great business at a fair price, the most intelligent move is often to do nothing at all and remain square.

Deciding to clear the board and hold only cash isn't a random act. It's typically driven by a clear-eyed assessment of the market landscape, though motivations can differ between investors.

For followers of a value-investing philosophy, going square is the logical result of their core principles. It's not about predicting a market crash but about responding to current prices.

• Lack of Opportunity: The primary reason a value investor goes square is a scarcity of attractively priced companies. When a bull market has driven prices to euphoric highs, very few, if any, businesses will be trading below their calculated intrinsic value. Instead of lowering their standards and overpaying, a disciplined investor like Warren Buffett would prefer to hold cash and wait.
• Upholding the Margin of Safety: The cornerstone of value investing is the margin of safety—buying an asset for significantly less than its true worth. When market exuberance erodes this buffer across the board, the risk of permanent capital loss outweighs the potential for further gains. Staying square is the ultimate protection of capital in such an environment.
• Emotional Discipline: Being square is a testament to an investor's ability to resist “FOMO” (Fear Of Missing Out). It's a conscious choice to step away from a party that has gotten too wild, trusting that a better, safer opportunity will eventually present itself.

While value investors take a long-term strategic view, short-term traders also use the concept of being square, but for tactical reasons. A day trader might “square up” all positions at the end of the trading day to avoid the risk of unexpected news moving the market overnight. Similarly, a trader might go square just before a major economic announcement, such as an interest rate decision from the Federal Reserve or an important inflation report, to avoid the volatility that often follows such events.

Like any investment stance, sitting on the sidelines has its own set of advantages and disadvantages.

• Capital Preservation: This is the most obvious benefit. If the market falls, your capital is safe. While others are nursing losses, your portfolio's value remains stable.
• Dry Powder: Being square means you have cash—or “dry powder”—ready to deploy. When a market correction or panic creates bargains, you are in a position to act decisively and buy wonderful companies at discounted prices while others are forced to sell.
• Mental Clarity: Constantly watching market fluctuations can be emotionally draining. Stepping away allows for a clearer, more rational perspective, free from the noise and panic of the herd.

• Opportunity Cost: This is the biggest risk of being square. If you're holding cash and the market continues to climb, you are missing out on those potential gains. A market can remain irrational and overvalued longer than you can remain patient.
• Inflation's Bite: Cash is not entirely risk-free. Inflation constantly erodes the purchasing power of your money. Holding cash for an extended period means its real value is slowly declining.
• The Itch to Act: It can be psychologically challenging to sit still while others appear to be making money. This can lead to impatience, causing an investor to abandon their discipline and jump back into an overvalued market at precisely the wrong time.

For a value investor, being square isn't a sign of indecision—it's the hallmark of discipline. It is the ultimate expression of the wisdom that sometimes the most profitable move is to do nothing. Think of Benjamin Graham's famous allegory of Mr. Market, your manic-depressive business partner who shows up every day offering to buy your shares or sell you his. On some days, he is euphoric and offers you outrageously high prices. On others, he is despondent and offers to sell his shares for pennies on the dollar. The intelligent investor's job is to ignore him on his euphoric days and take advantage of him on his pessimistic ones. Being square is simply politely declining Mr. Market's silly, high-priced offers. It’s not timing the market; it's waiting for the “fat pitch”—that rare, obvious, and highly attractive opportunity. In the long run, the profits you make from the bargains you buy during market panics will far outweigh the gains you miss while patiently waiting in cash.