racemize

I think the distribution is a little bit odd since 25% is very close to S&P returns. There's probably a lot of people very close to 25% that are in the 10-24% bucket.

Ok, so as another test, I just went and recalculated what Pabrai's performance would have been if he had held cash most of the time and put it all in after the big downturns (2009 and 2012). Results are interesting: For PIF2, adding any amount of cash reduced overall performance For PIF3, ideal cash amount turned out to be 33% For PIF4, ideal cash amount turned out to be 98% So, mixed bag! Pabrai's returns seem to be more prone to needing cash than the market, which I've never gotten a positive result for holding cash.

You are correct.

I actually tend to disagree with this approach. e.g., if I were to invest in the S&P, I would not do it in the same manner I would invest in stocks. For example, some of the skill is identifying when is a good time to buy a security, and which may correspond to a market downturn (e.g., 2009/2011). An indexer will not do this; instead, they would dollar cost average and never pay any attention. Thus, I think putting the same amount of money in the S&P at the same time either gives too much benefit to the S&P benchmark if you are right, or doesn't give credit to the S&P benchmark if you are wrong.

I was referring to this board.

Well, I'm mostly trying to figure out if it makes sense. We want to be sure we learn the right lessons from 2008 and do not overreact to it. Marks said something similar, e.g., if we try to prepare for 2008 scenarios, we can only own cash and gold, or something along those lines.

Similar type of comments coming from BAM, where they think the sheer capital inflows will have to go someplace, and in their theory, real estate/real assets. Same reasoning might drive down yields.

I tend to think the younger folks are the ones who are on here during the day. Give it some time to develop.

This has been done before? I did a quick search and didn't find one. I feel like it was a year ago, don't remember the post name though. It was horrendously lop-sided, as I recall.

last time, I think it came down to 99% male.

I got in with a write-up of AIG, but then someone else posted one while I was waiting for approval, so I couldn't use it as one of my ideas. Generally, I think just be very thorough. I can send my AIG write-up if you like. I let my VIC expire. I think the board is better, and moreover, forcing 2 ideas a year seems like a bad idea, are there really 400+ good ideas a year? I don't think so...

from a guy with 1100 posts lol *rolleyes* I think he's been here a while... Also, 5 is probably the biggest issue with the board, but it is understandable. I posted way too much when I first joined too. Perhaps I still do.

Well, I'll add a lower one to make you 50%s feel better. I'm at 24.2% for the year, mostly due to lower returns of compounders (e.g., FFH) and a residual holding from last year that went down pretty hard. BAC calls mostly offset those though. For all the >100% people, I guess you were moving in and out of stuff? I don't have any positions with > 50% gains, other than BAC calls.

Well, the change in regime is very interesting--however, it seems hard to really pinpoint the reasons for it. Certainly, I could see accounting changes having a part in it, but I tend to think the lack of war idea is probably not that big of factor. I'll also be interested to see how the next 20 or so years go, so I mostly withhold judgement until then.

How is that even possible? I had also assumed it would be all or nothing always. Are you using fixed income for cash? Thanks Vinod I'm not entirely sure--either there's an error in several of my examples, or the behavior is something I didn't expect. I'm looking at it more now. Edit: Looks like it is a trade off between the value of the normal returns versus the bonus return and how often the cash is deployed. I think it makes sense, but where that point is is not intuitive.

Sure, but they are extremely messy, so I'm not sure anyone can understand what is going on besides me: https://docs.google.com/spreadsheet/ccc?key=0AhTPR9eP5nWedEJBNk9ucGNxOUJzTkotQXVNMkg3OHc&usp=sharing

I take back my statement about the cash % always being all or nothing. I found a situation where the ideal cash number was 35%, interestingly. Back to the models...

might as well wait an extra couple of weeks.

Well, in those situations, you would not have had opportunities that met your hurdle, so you would naturally have cash. I'm talking about the situation where you do have opportunities exceeding your hurdle, and whether or not it makes sense to hold cash in spite of them.

Joel, I am not talking about downturns… great opportunities might arise for very different reasons… And a general market downturn is only one of them! A BP’s offshore plant blows up, and XOM sells off abruptly… Merck is sued over some flawed drug in its portfolio of patented dugs, and Abbott sells off abruptly… They are only two of the examples that come to my mind right now, and that I was able to take advantage of in the recent past. How could you predict when and why those kind of opportunities might present themselves? Imo, it simply is not possible. Gio It is not possible, but the question is, should you turn away other good investments that meet your hurdles in order to get that opportunity? Unless they happen very often, the answer appears to be no. Moreover, I find it hard to believe that if one of these opportunities arose, one could not find a position that had not appreciated that could be sold for the new opportunity. The only time that is not the case is in market downturns, when most positions have not appreciated. Then it may start to make sense, but the opportunity has to be very large to sacrifice the gains that would have been made by not holding the cash!

Sure, I guess, but that doesn't indicate whether it was rational or not. Him being stubborn doesn't make any sense to me to argue one side or the other--either he had good reasons or he didn't.

Well, I initially just used S&P returns, which is quite volatile. The problem is, it doesn't work for those situations. The only way it works is if you get significantly better returns than the market on those up years but weren't so good previously. It is simply very hard to make up for the loss of investments prior. I need to find annual returns back to the beginning of the 20th century though, as the S&P data set isn't big enough right now. I hesitate to just make up scenarios--let's say it works in some made up scenarios, does that mean it is a good idea? Hard to know. For example, your 100% return example--that's never happened in the market right? Pabrai did it once or twice with his money (I think 2002/3 and then 2009), so maybe that's why you put it in. I hesitate to ever assume that will happen. Moreover, consider the same example you just provided--if you had kept 100% cash, and then reinvested, it would have been better. Generally, any time a model says it is good to withhold any amount of cash, you should have withheld the entire amount. Thus, it seems that this is almost an all or nothing proposition--either don't hold cash or only deploy cash at the bottom--any choice in between is sub-optimal. Of course, then you have to consider what situations each one wins in. I think holding cash only works in extreme situations (e.g., such as yours where the drop is 40%+). I'm not arguing against hurdle rates--I'm trying to figure out if the graded hurdle rate makes sense. i.e., can we show that it is rational or not to move from 2-3x requirements to 7x requirements for the last 5%? I'd like to compare a portfolio that does the first hurdle rate all the time and a second that does the graded requirement (or just a simple requirement) all the time to see which wins in most situations. So far, it seems like holding cash will only work in extreme down turn situations, and they would have to happen fairly often. I'd like to come up with something more rigorous than what I've made so far, though.

article discusses earnings changes and possibility of new plateau for CAPE. Seems a little optimistic, but interesting: http://philosophicaleconomics.wordpress.com/2013/12/13/shiller/

I just tried re-doing this where the year before the market as a whole goes down. e.g.: Year 1: 15% Year 2: 15% Year 3: 15% Year 4: -15% Year 5: 15% where in years 1-4 in x% cash, year 5: 100% allocated. This makes the idea work a bit better. If you assume this occurs every 5 years, with the above returns, your extra cash only has to make 45% the fifth year to match the returns. At 6 years: 67%, at 7 years: 78%. That starts to be similar to Pabrai's rules, assuming he can pull off those big returns on the down years. However, note that the % cash does not matter. If the rule holds, then you should just be 100% in cash in years 1-4 and then 100% in at the high returns on year 5. Thus, I haven't seen anything where having a low percentage of cash is better than a high percentage, it either breaks the threshold or it doesn't.

This is worth some more thought on my part; however, I've never actually used puts before. Would you mind giving an example that you think would be in the ball park of what you are saying, so I could play around with it?