Good blog post on FFH

[racemize]

My issue is that you appear to just be assuming the people you quote are correct.  I don't like to assume anything, really, even it appears to make sense.  You are using a particular system, but how can you be sure it is the right one?  How can you be sure that holding cash will give you higher returns?  Perhaps you don't care about getting higher returns, but want to be conservative?  I don't really know.  I'm just trying to figure out what gives higher returns over the long term.

 

Who? Mr. Franklin? Mr. Vanderbilt? Mr. Sage? Mr. Baker? Mr. Mellon? Mr. Templeton? Mr. Getty? Even Mr. Buffett and Mr. Munger? No, I don’t think I am assuming anything… They have been the richest and most successful entrepreneurs in history. Period.

I certainly don’t know if studying their methods and imitating them might lead to the highest returns possible over the long term… But I am confident enough those returns will be satisfactory. ;)

 

Gio

 

I don't think Buffett and Munger recommend holding cash for the sake of holding cash.  Instead, they invest in businesses that are cheap.  I haven't seen anything from Buffett that indicates he would hold more cash because CAPE was high or anything of that nature.  Perhaps we are just talking past each other at this point, however.

[writser]

Joel,

I have really a very hard time to believe in models and spreadsheets. Usually in all the models I have seen, put in the slightest of changes, and you get completely different results.

To imitate great entrepreneurs of the past and their behavior, or at least try to, is still the most sensible policy I have come up with. ;)

 

Gio

 

These are extremely simple "models".  All I'm doing is assuming that a certain amount of cash is held (or a variable amount of cash, based on a metric (such as CAPE or something else)) and then deployed at the bottom and it tells me what the results are.  I've changed assumptions over and over again, and it pretty much always says that the higher returns come in when you are fully invested.  The cost of cash is very high, generally.

 

My issue is that you appear to just be assuming the people you quote are correct.  I don't like to assume anything, really, even it appears to make sense.  You are using a particular system, but how can you be sure it is the right one?  How can you be sure that holding cash will give you higher returns?  Perhaps you don't care about getting higher returns, but want to be conservative?  I don't really know.  I'm just trying to figure out what gives higher returns over the long term.

 

(this might be a bit off-topic)

 

Gio: your contributions make sense, your portfolio will probably do good over the long run and you are clearly a knowledgeable investor. But for some reason I always feel obliged to challenge your posts, even though I agree for 95% with what you are doing. I've been wondering for a while why that is the case :). I think the core of the issue is that you're more of a 'people'-based investor and some others here (racemize) are more 'math'-based. I'm not sure at all that either strategy is better than the other. It's just a question of what fits you best. Personally, I like numbers. I think I'm no expert at judging people. So as long as management doesn't look grossly incompetent or fraudulent I prefer to judge based upon numbers rather than management. When I look at the Fairfax results for the last decade I tend to give the numbers more weight and then it doesn't look spectacular (not bad of course). When you look at Fairfax you probably give more weight to your judgement of management and then it looks a lot better.

 

What this thread boils down to is one group of posters saying "look at ratio A, cashflow B and book value C". And another group of posters replying "Management said X. Management will do Y. Management did Z in the past". The discussion will never end because these are two different (valid) ways of valuing a company - in a way we're talking past each other (hah, not the first one to suggest that I see). Nevertheless I enjoy the discussion, By all means please keep on going!

[writser]

An addition: I think one of the risks of your investment strategy is that you develop a confirmation bias. You think stock markets are overvalued and debt is scary so you end up buying into owner-operators who think likewise. You go to AGM's where everybody thinks the same way and you defend your convictions by quoting people who think similar things. Not necessarily a bad thing if these people are smart and succesfull but it makes it practically impossible to falsify your investment theses. And the more time, money and conviction you have invested in these ideas the harder it will become to say: "well I might have been wrong after all, let's buy Twitter!" :)

 

To counter that, one of the risks of my investment strategy is that I tend to end up owning stuff with questionable management or in questionable industries simply because it's very cheap - ignoring the fact that these things could be cheap for a reason and that I could very well be better off just buying Fairfax and leaving it alone for a decade.

[wisdom]

Racemize - I would not go by what Munger and Buffett say - watch what they do.

 

If you read up on what Munger did with DJCO before 2008 and Buffett's personal portfolio going into 2008 - you will find Gio is right.

[racemize]

Racemize - I would not go by what Munger and Buffett say - watch what they do.

 

If you read up on what Munger did with DJCO before 2008 and Buffett's personal portfolio going into 2008 - you will find Gio is right.

 

In his early days, he stayed pretty well invested.  Moreover, the point of my experiments/models/studies is to verify it for myself.  I have not found any reason to hold cash for its own sake (or based on general market expectations).  I completely agree that one should hold cash if there are no good opportunities around. 

 

I also think the two examples you gave are not all that germane.  In both cases, I suspect that they were just doing conservative investments (generally bonds) and simply could not pass up the opportunity to invest when the market lows were hit.  In other words, I don't think they were investing those two portfolios for the purpose of maximizing returns.  Further, while it may have worked in their favor because 2008 occurred and gave them that opportunity, I have found no evidence that it is true over long investment horizons. 

 

I guess this all comes down to this--if there is a strategy where holding cash works based on anything other than running out of opportunities, then please show that it outperforms (and I'm referring to anything, there are constant macro posts, CAPE posts, Grantham posts, Hussman posts, etc.--if those ideas can result in higher returns, then I'm all for it, I just haven't found anyone showing that they actually do.  I have found lots that say that they don't.).  I don't see how one can stand behind strategies without proving that returns are better than when not using them. 

[Liberty]

Racemize - I would not go by what Munger and Buffett say - watch what they do.

 

If you read up on what Munger did with DJCO before 2008 and Buffett's personal portfolio going into 2008 - you will find Gio is right.

 

If you really want to watch what they do, you have to watch what they do at Berkshire. The rest is probably 0.1% of their attention, which can explain why they keep it as low-maintenance as possible and only do something when it would be ridiculous not to do so (and even that doesn't really change their net worth, it's probably more for the principle).

 

There's been a 5-part series recently at Brooklyn Investor looking at Buffett's whole history of getting in or out of stocks based on macro outlook/valuation timing. It's very informative, I recommend it.

[frommi]

1. What Berkshire or any other insurance company does with cash has more to do with their need for liquidity for their business then with being liquid when the market falls. It should not guide you what you do in your own portfolio.

 

2. You can ignore all studies that show that low P/B, low EV/EBIT or smallcap stocks outperform the market or that holding cash dampens returns, but i doubt that you will be able to beat the market without that knowledge and usage.

 

3. I have never seen a study where you could identify a good manager after the fact is widely known and profiting from it and outperform the market with this knowledge by wide margins. I would bet that you get the same results like investing in the best mutual funds of the last years, and that is severe underperformance.

 

4. Market timing on a portfolio level doesn`t work, basta. Thats proven ad adsurdum, so why do so much people still do it? (It is not rational.)

 

....

 

5. The market will crash next week! :D (But i will still hold 107% stocks!)

 

[Hielko]

1. What Berkshire or any other insurance company does with cash has more to do with their need for liquidity for their business then with being liquid when the market falls. It should not guide you what you do in your own portfolio.

Very good point imo that not all investors seem to appreciate sufficiently. Part of the cash on the balance sheet should be consider as working capital (for possible claims, to maintain their credit rating): it's not excess cash that can be invested in anything.

4. Market timing on a portfolio level doesn`t work, basta. Thats proven ad adsurdum, so why do so much people still do it? (It is not rational.)

Totally disagree with this. It might be true that market timing doesn't work, but that certainly hasn't been proven. Academic research can only look at simple rule based systems, and macro is probably too complex to make it possible to create a rule based system that delivers out-performance. That doesn't mean that it is impossible to time the market. Some humans might be able to handle unique situation after unique situation, something that would be nearly impossible to test in a scientific way.

 

There is no proof that market timing works, but there is certainly no proof that it doesn't work (this would really be a nearly impossible, if not totally impossible proof)

[kilroy04]

Slide 25 from the 2011 AGM.  Returns with and without hedges.  FFH hedges. It's what they do. They were doing it around 2000 and there was some angst around it then as well - particularly when there were issues of increasing asbestos reserves.  The nature of their returns and the stock since the big correction of the late 90's is to stagnate and pop, stagnate and pop.  It's stagnating now.......  2-3 years ago there were tremendous complaints about underwriting.  Yes, cats were light this year, but Andy Bernard working on the culture of underwriting seems to be having an effect.  I spoke with him at last years AGM and it was clear that he saw practices in the various companies that could be improved.  Improvement has and is happening.  Cost of float has declined from around 4 (if I remember right) to 2 to less than 1% over the past decade or so. There is a real chance of being paid for float going forward (and cumulative since the Prem took over).  The insurance business is getting a bigger foot print, is expanding, and will expand tremendously in the next hard market.  This will drive up float, provide more investments/share and thus improve book value. We just don't know when a hard market will come.  Last time they essentially doubled underwriting.  Think about that impact on float!

 

If they are wrong about the hedges and BBRY - there's room to regroup again. They will if that is the case. The concerns about acquisition and investment business quality, as well as the hedges, are simply the concerns of this year. These are all far less threatening than the acquisitions of TIG and C&F and the associated reserving issues that came to light in the early 2000's.  Time tends to fix things when you have honest and aligned management.  And it puts things in perspective for those of us on the outside.

 

If you absolutely need and expect yearly 15% returns - you'll probably be disappointed.  The data shows less since the late 90's. If it happens - great!  The numbers to achieve it are certainly there and I certainly hope it does.  It is a $1000+ stock someday.  Just not as soon as we might wish.....

[Myth465]

An addition: I think one of the risks of your investment strategy is that you develop a confirmation bias. You think stock markets are overvalued and debt is scary so you end up buying into owner-operators who think likewise. You go to AGM's where everybody thinks the same way and you defend your convictions by quoting people who think similar things. Not necessarily a bad thing if these people are smart and succesfull but it makes it practically impossible to falsify your investment theses. And the more time, money and conviction you have invested in these ideas the harder it will become to say: "well I might have been wrong after all, let's buy Twitter!" :)

 

 

Nothing more to add.

[frommi]

There is no proof that market timing works, but there is certainly no proof that it doesn't work (this would really be a nearly impossible, if not totally impossible proof)

 

My experience and numbers tell me that it works where nobody else is doing it, but doesn`t work where everybody else does it. And this makes sense to me because it is a pure alpha thing. But for the global indices you have much too much competition to make correct timing calls consistently. It is like the physical problem with schrödinger's cat, where you change the outcome of the experiment when you look into the box. When too many people see the crash coming, they prevent it by not being invested and investing when the market goes down by 5%.

[james22]

I guess this all comes down to this--if there is a strategy where holding cash works based on anything other than running out of opportunities, then please show that it outperforms (and I'm referring to anything, there are constant macro posts, CAPE posts, Grantham posts, Hussman posts, etc.--if those ideas can result in higher returns, then I'm all for it, I just haven't found anyone showing that they actually do.  I have found lots that say that they don't.).  I don't see how one can stand behind strategies without proving that returns are better than when not using them.

 

Could you share your experiment/model/study work as Hussman has? Or show how his work is in error?

 

Aligning Market Exposure With the Expected Return/Risk Profile

 

http://www.hussmanfunds.com/wmc/wmc130506.htm

 

http://www.hussmanfunds.com/wmc/wmc131118.htm

[james22]

My take from Joel's analysis is the on average there is an opportunity cost for holding cash.  In other words market timing doesn't work.  Right now I think it happens to be very high versus before the financial crisis.  Before 2008 10-yr treasury rates were seldom below 4% and was typically above 5% late in market rallies.  Now we are at 2.6% for the 10-yr treasury or 2.2% for BND (a diversified mix of bonds).  So in previous times you went from stocks to something that would retain purchasing power or grow slightly.  Now you have a situation where cash is a decaying asset where it is being debased every year.  Over short periods of time this is fine but if you hold cash for multiple years you are going backwards.

 

Packer

 

If you expect US High Quality to return only 2.1%, the opportunity cost is very low.

 

https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIDZrv0FZiZbpIB3l3m%2fhybvfBpUIeImpq8f72rdLvXx7f3CjhzC9Q%2bpmRQspgkX63FM7bVF3Dp6phYxicYC3kOpmUyxo6d05eU%3d

[frommi]

Could you share your experiment/model/study work as Hussman has? Or show how his work is in error?

 

Aligning Market Exposure With the Expected Return/Risk Profile

 

http://www.hussmanfunds.com/wmc/wmc130506.htm

 

http://www.hussmanfunds.com/wmc/wmc131118.htm

 

Thats pretty easy. He choose a moving average of 39 weeks why not 20, 40 or 50? Because he has done curve fitting.

 

http://philosophistry.com/notes/the-backtest-fallacy

[giofranchi]

I don't think Buffett and Munger recommend holding cash for the sake of holding cash.  Instead, they invest in businesses that are cheap.  I haven't seen anything from Buffett that indicates he would hold more cash because CAPE was high or anything of that nature.  Perhaps we are just talking past each other at this point, however.

 

FIRST:

Charlie and I believe in operating with many redundant layers of liquidity, and we avoid any sort of obligation that could drain our cash in a material way. That reduces our returns in 99 years out of 100. But we will survive in the 100th while many others fail. And we will sleep well in all 100.

--2012AL

 

Besides, look at the numbers at 2013 year end: $48 billion of cash, or 21% of equity; $29 billion in bonds, or another 13% of equity; they also have businesses that bring in almost $24 billion of new cash each year, or 11% of equity.

Have you ever tried to put together a portfolio that yields 11% in cash and still can grow in value over time? I have! And have come to the conclusion that without leverage it is almost impossible!

 

When people say “I am in Buffett’s camp”… My first reaction is to think: “No! You most definitely are not!” ::)

 

SECOND:

In business I experience quite often that it is much better to do nothing, rather than to embark in any venture that presents itself at any time. In business there is certainly no such thing as “a constant flow of good opportunities”… I have just an extremely hard time to believe that the stock market, which is a market of businesses, works so much differently from business itself, and always has to offer some good opportunities. ???

 

THIRD:

Presently I run a very concentrated portfolio: FFH, LRE, ALS, and BH. They have all come down and I think they all are cheap. Yet, VRX and ENDP, which I like, have come down much harder and are approaching my target price for buying more and do so aggressively. If you were in my shoes, would you prefer to have some cash on the sidelines to purchase VRX and ENDP, or be forced to sell some of my 4 investments, even though they also have come down and I think they are cheap? ;)

 

Gio

 

[giofranchi]

An addition: I think one of the risks of your investment strategy is that you develop a confirmation bias. You think stock markets are overvalued and debt is scary so you end up buying into owner-operators who think likewise. You go to AGM's where everybody thinks the same way and you defend your convictions by quoting people who think similar things. Not necessarily a bad thing if these people are smart and succesfull but it makes it practically impossible to falsify your investment theses. And the more time, money and conviction you have invested in these ideas the harder it will become to say: "well I might have been wrong after all, let's buy Twitter!" :)

 

 

Nothing more to add.

 

Thank you, writser and Myth,

I guess the reason you always feel compelled to challenge my posts is simply I cannot sport outstanding results. I certainly don’t have the results of a Packer or an Eric… And this is actually a very good reason! No doubt about it! ;)

 

As far as the “confirmation bias” is concerned, that’s why a like the board so much! Because there is a writser and there is a Myth, who constantly challenge my posts and investment ideas! By doing so, you strongly mitigate the risk of a “confirmation bias”!

You have not succeeded in convincing me to change my approach of doing business yet, but please keep on trying!! ;D ;D

 

Gio

 

[Packer16]

My take from Joel's analysis is the on average there is an opportunity cost for holding cash.  In other words market timing doesn't work.  Right now I think it happens to be very high versus before the financial crisis.  Before 2008 10-yr treasury rates were seldom below 4% and was typically above 5% late in market rallies.  Now we are at 2.6% for the 10-yr treasury or 2.2% for BND (a diversified mix of bonds).  So in previous times you went from stocks to something that would retain purchasing power or grow slightly.  Now you have a situation where cash is a decaying asset where it is being debased every year.  Over short periods of time this is fine but if you hold cash for multiple years you are going backwards.

 

Packer

 

If you expect US High Quality to return only 2.1%, the opportunity cost is very low.

 

https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIDZrv0FZiZbpIB3l3m%2fhybvfBpUIeImpq8f72rdLvXx7f3CjhzC9Q%2bpmRQspgkX63FM7bVF3Dp6phYxicYC3kOpmUyxo6d05eU%3d

 

I am very skeptical of GMO expected return projections except for relative performance of asset classes.  What I find interesting is GMO has smart folks comes up with the predictions and the performance of there mutual funds are average at best.  What that tells me is they are good story tellers but the stories don't always come true and they have not found a way to turn there stories into real profit in the market or maybe the they get the upside via fees versus thier investors.

 

Packer

[Valuebo]

I don't think Buffett and Munger recommend holding cash for the sake of holding cash.  Instead, they invest in businesses that are cheap.  I haven't seen anything from Buffett that indicates he would hold more cash because CAPE was high or anything of that nature.  Perhaps we are just talking past each other at this point, however.

 

FIRST:

Charlie and I believe in operating with many redundant layers of liquidity, and we avoid any sort of obligation that could drain our cash in a material way. That reduces our returns in 99 years out of 100. But we will survive in the 100th while many others fail. And we will sleep well in all 100.

--2012AL

 

Besides, look at the numbers at 2013 year end: $48 billion of cash, or 21% of equity; $29 billion in bonds, or another 13% of equity; they also have businesses that bring in almost $24 billion of new cash each year, or 11% of equity.

Have you ever tried to put together a portfolio that yields 11% in cash and still can grow in value over time? I have! And have come to the conclusion that without leverage it is almost impossible!

 

When people say “I am in Buffett’s camp”… My first reaction is to think: “No! You most definitely are not!” ::)

 

SECOND:

In business I experience quite often that it is much better to do nothing, rather than to embark in any venture that presents itself at any time. In business there is certainly no such thing as “a constant flow of good opportunities”… I have just an extremely hard time to believe that the stock market, which is a market of businesses, works so much differently from business itself, and always has to offer some good opportunities. ???

 

THIRD:

Presently I run a very concentrated portfolio: FFH, LRE, ALS, and BH. They have all come down and I think they all are cheap. Yet, VRX and ENDP, which I like, have come down much harder and are approaching my target price for buying more and do so aggressively. If you were in my shoes, would you prefer to have some cash on the sidelines to purchase VRX and ENDP, or be forced to sell some of my 4 investments, even though they also have come down and I think they are cheap? ;)

Gio

 

 

Easy: being invested fully! You just move around the level of portfolio concentration and leverage and focus on certain stocks depending on market conditions.

You are NOT doomed to underperform someone who has cash on hand even if he times the market perfectly. That's why I prefer not to own say GM WTB now if normal stocks give me the same upside but better downside protection. I can always sell a normal stock position for a big loss only to buy something leveraged (like GM warrants) at even better prices. It's exactly what many here have done in times of market distress. There are no extra points given for holding core holdings no matter what.

Psychologically it can also be easier to load up on things if that money is already in the market anyway. 

Btw, If you believe even half of what Prem has to say I would hold on dearly to my FFH shares and hope to pick up VRX much much lower. No need to rush things as it is one of those stocks that could drop much further. Don't expect it to sit on $100/share if you think the S&P500 can see the 1500-1600 level. Just my two cents.

[Packer16]

I don't think Buffett and Munger recommend holding cash for the sake of holding cash.  Instead, they invest in businesses that are cheap.  I haven't seen anything from Buffett that indicates he would hold more cash because CAPE was high or anything of that nature.  Perhaps we are just talking past each other at this point, however.

 

FIRST:

Charlie and I believe in operating with many redundant layers of liquidity, and we avoid any sort of obligation that could drain our cash in a material way. That reduces our returns in 99 years out of 100. But we will survive in the 100th while many others fail. And we will sleep well in all 100.

--2012AL

 

Besides, look at the numbers at 2013 year end: $48 billion of cash, or 21% of equity; $29 billion in bonds, or another 13% of equity; they also have businesses that bring in almost $24 billion of new cash each year, or 11% of equity.

Have you ever tried to put together a portfolio that yields 11% in cash and still can grow in value over time? I have! And have come to the conclusion that without leverage it is almost impossible!

 

When people say “I am in Buffett’s camp”… My first reaction is to think: “No! You most definitely are not!” ::)

 

SECOND:

In business I experience quite often that it is much better to do nothing, rather than to embark in any venture that presents itself at any time. In business there is certainly no such thing as “a constant flow of good opportunities”… I have just an extremely hard time to believe that the stock market, which is a market of businesses, works so much differently from business itself, and always has to offer some good opportunities. ???

 

THIRD:

Presently I run a very concentrated portfolio: FFH, LRE, ALS, and BH. They have all come down and I think they all are cheap. Yet, VRX and ENDP, which I like, have come down much harder and are approaching my target price for buying more and do so aggressively. If you were in my shoes, would you prefer to have some cash on the sidelines to purchase VRX and ENDP, or be forced to sell some of my 4 investments, even though they also have come down and I think they are cheap? ;)

 

Gio

 

Gio,

 

Have you developed upside values for these companies?  If so then you can buy/sell each when you think one cheap and the other expensive.  This way you are always exposed to good businesses and just shift the allocation when you find a definately cheaper one.  Cash only becomes an option when all your stocks are at fair value.

 

Packer

[giofranchi]

Easy: being invested fully! You just move around the level of portfolio concentration and leverage and focus on certain stocks depending on market conditions.

You are NOT doomed to underperform someone who has cash on hand even if he times the market perfectly. That's why I prefer not to own say GM WTB now if normal stocks give me the same upside but better downside protection. I can always sell a normal stock position for a big loss only to buy something leveraged (like GM warrants) at even better prices. It's exactly what many here have done in times of market distress. There are no extra points given for holding core holdings no matter what.

Psychologically it can also be easier to load up on things if that money is already in the market anyway. 

Btw, If you believe even half of what Prem has to say I would hold on dearly to my FFH shares and hope to pick up VRX much much lower. No need to rush things as it is one of those stocks that could drop much further. Don't expect it to sit on $100/share if you think the S&P500 can see the 1500-1600 level. Just my two cents.

 

Mine was a rhetorical question…! There is no doubt it is better to have cash, which has not depreciated, than to use a currency which instead has depreciated, like the price of my 4 investments… and a market correction hasn’t even begun!

 

Anyway tombgrt, listen, I don’t jump in and out of stocks. I want to increase my holdings of those 4 investments of mine over time, not decrease them. And at the same time I want to be able to seize any great opportunity that comes my way. To hold some cash makes it easy to achieve both goals.

If on the other hand you think you can “move around the level of portfolio concentration and leverage and focus on certain stocks depending on market conditions”, well… then good for you!

I have some difficulties even to understand exactly what you mean, let alone implementing it!

That’s why I don’t like math in investing, even if I am an engineer and I have always loved math and always been very good at it: because I want to keep it as simple as possible, in business I have yet to find something difficult that works well in the end. ;)

 

Maybe you are right about VRX. But you also know that, when the price is a fair one, I pull the trigger. Then, if I get the chance to, I average down as long as I might. I will start buying around $100-110, and go on buying to the $60-$70 range.

 

Gio

 

[giofranchi]

Gio,

 

Have you developed upside values for these companies?  If so then you can buy/sell each when you think one cheap and the other expensive.  This way you are always exposed to good businesses and just shift the allocation when you find a definately cheaper one.  Cash only becomes an option when all your stocks are at fair value.

 

Packer

 

Thank you Packer!

And this I understand better, even if I don’t like it much, because it assumes too much buying and selling on my part. The more I buy and sell, the greater the chances I am making stupid decisions! ;)

 

Anyway, I strongly believe that all 4 investments of mine are trading below fair value right now! Imo they are not even at fair value! That’s why I am grateful I have some cash to take advantage of good opportunities.

 

Gio

 

[Valuebo]

Easy: being invested fully! You just move around the level of portfolio concentration and leverage and focus on certain stocks depending on market conditions.

You are NOT doomed to underperform someone who has cash on hand even if he times the market perfectly. That's why I prefer not to own say GM WTB now if normal stocks give me the same upside but better downside protection. I can always sell a normal stock position for a big loss only to buy something leveraged (like GM warrants) at even better prices. It's exactly what many here have done in times of market distress. There are no extra points given for holding core holdings no matter what.

Psychologically it can also be easier to load up on things if that money is already in the market anyway. 

Btw, If you believe even half of what Prem has to say I would hold on dearly to my FFH shares and hope to pick up VRX much much lower. No need to rush things as it is one of those stocks that could drop much further. Don't expect it to sit on $100/share if you think the S&P500 can see the 1500-1600 level. Just my two cents.

 

Mine was a rhetorical question…! There is no doubt it is better to have cash, which has not depreciated, than to use a currency which instead has depreciated, like the price of my 4 investments… and a market correction hasn’t even begun!

 

Anyway tombgrt, listen, I don’t jump in and out of stocks. I want to increase my holdings of those 4 investments of mine over time, not decrease them. And at the same time I want to be able to seize any great opportunity that comes my way. To hold some cash makes it easy to achieve both goals.

If on the other hand you think you can “move around the level of portfolio concentration and leverage and focus on certain stocks depending on market conditions”, well… then good for you!

I have some difficulties even to understand exactly what you mean, let alone implementing it!

That’s why I don’t like math in investing, even if I am an engineer and I have always loved math and always been very good at it: because I want to keep it as simple as possible, in business I have yet to find something difficult that works well in the end. ;)

 

Maybe you are right about VRX. But you also know that, when the price is a fair one, I pull the trigger. Then, if I get the chance to, I average down as long as I might. I will start buying around $100-110, and go on buying to the $60-$70 range.

 

Gio

 

 

Well Gio, that's what the whole discussion on holding cash and timing has been about no? The whole point is that you can't know what the stock market will do. So while you hold cash, other guys are shifting resources from more expensive to cheaper things and making a killing. If a correction comes they will suffer more but they will just keep allocating to the cheapest things they can find. When the market tanks they do the same as the one who has cash to deploy, getting a better expected return on their portfolio. Difference is that they do it all the time which is not a bad thing to do as cash has a very high opportunity cost in the stock market.

 

Btw, I really don't get your fixation on keeping every share of your main holdings. If I'm not mistaken there also isn't any capital gain tax in Italy? Yes, those shares are pieces of real businesses but I'm in business of getting wealthier, not in the business of collecting a virtual museum.

[gary17]

 

The only thing I'd add to this discussion is that in order for value to be realized, the unknown here is timing,,, and one thing I know john Templeton has said : to always be flexible. It's great to be disciplined and follow your own methods but be a bit more flexible with alternatives.  Might serve you well.  Just my two cents.

[Packer16]

Gio,

 

Have you developed upside values for these companies?  If so then you can buy/sell each when you think one cheap and the other expensive.  This way you are always exposed to good businesses and just shift the allocation when you find a definately cheaper one.  Cash only becomes an option when all your stocks are at fair value.

 

Packer

 

 

Thank you Packer!

And this I understand better, even if I don’t like it much, because it assumes too much buying and selling on my part. The more I buy and sell, the greater the chances I am making stupid decisions! ;)

 

Anyway, I strongly believe that all 4 investments of mine are trading below fair value right now! Imo they are not even at fair value! That’s why I am grateful I have some cash to take advantage of good opportunities.

 

Gio

 

As you say to prevent stupid mistakes I only buy when my replacement has double the upside of the security I am selling.  This leads to only a few trades every few years in each security.  Also, the uncertainty of my value estimates can be pretty wide also and forces me to show that grass is indeed greener elsewhere.

 

Packer

[giofranchi]

Well Gio, that's what the whole discussion on holding cash and timing has been about no? The whole point is that you can't know what the stock market will do. So while you hold cash, other guys are shifting resources from more expensive to cheaper things and making a killing. If a correction comes they will suffer more but they will just keep allocating to the cheapest things they can find. When the market tanks they do the same as the one who has cash to deploy, getting a better expected return on their portfolio. Difference is that they do it all the time which is not a bad thing to do as cash has a very high opportunity cost in the stock market.

 

Btw, I really don't get your fixation on keeping every share of your main holdings. If I'm not mistaken there also isn't any capital gain tax in Italy? Yes, those shares are pieces of real businesses but I'm in business of getting wealthier, not in the business of collecting a virtual museum.

 

But, Tom, most of those people you refer to have only the illusion to know what they are doing! And that illusion is kept alive by nothing more than a market which went up 30%+ in a year! You really think everyone can jump in and out of a lot of different businesses, only because someone like Packer is successful in doing that?! I am sure I cannot!!

 

Let me put this very clear: Right now I am fixating my whole attention on just 5-6 businesses, and I have the general conviction that they are undervalued, but no real idea which one is most undervalued! Even devoting a lot of time to follow each one of those businesses, because they are few and therefore I can follow them closely, I don’t think I can truly pick-up one and say with great confidence this is the most undervalued of the bunch! Let alone make comparisons among each one of them! This is not how businesses work! Businesses are complicated, constantly evolving things. And our experiences are very limited indeed!

 

If you put together a portfolio of 100 statistically cheap stocks, like Kraven does, that’s a whole different story, and I might agree with you a constant rebalancing of that portfolio might work out just fine! But it is simply not what I do…

 

Neither I am interested in putting together a virtual museum! But I would like to minimize my decisions of buying and selling. That’s why I have come to the conclusion that to partner with great entrepreneurs and to let them do their work is the most sensible course of action for me. And I will sell my holdings only when greatly overvalued.

Like Packer has suggested, if one of them is deeply undervalued, while the others are above fair value, I also think it is safe enough to shift some capital from the fairly valued to the deeply undervalued… but that is where my trading activities will stop!

 

Gio