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How much cash do you hold?


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race,

 

I agree that it's impossible to time it perfectly. However, I do think there are times to be super aggressive (in times of extreme fear) or times to be super conservative (in times of extreme greed). Perhaps I'm wrong, but I think moving things slowly -as the pendulum swings - should help with overall results. Even Buffett (his personal account) and Munger were sitting in cash/bonds before 2008.

 

One thing to note with Marks--he is required to be fully invested.  When he talks about the pendulum and the corresponding amount of aggression he uses, he's talking about being conservative or aggressive with the hurdle and/or assumptions being made, not holding cash.  I think such a strategy makes a lot of sense (i.e., more conservative assumptions for specific investments as the pendulum moves toward greed).

 

With regard to using it for cash holding purposes, it sounds perfectly reasonable.  The problem I have, however, is that many ideas that are "reasonable" (e.g., using CAPE or other valuation metrics to move in and out of the market) are not supported by evidence in producing superior long-term results.  Basically, I'm taking the stance that there should be compelling evidence to use any particular strategy.  I feel like many of us use superstitions and gut feelings for a lot of this area of investing, which I'm not comfortable with, personally.

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race,

 

I agree that it's impossible to time it perfectly. However, I do think there are times to be super aggressive (in times of extreme fear) or times to be super conservative (in times of extreme greed). Perhaps I'm wrong, but I think moving things slowly -as the pendulum swings - should help with overall results. Even Buffett (his personal account) and Munger were sitting in cash/bonds before 2008.

 

One thing to note with Marks--he is required to be fully invested.  When he talks about the pendulum and the corresponding amount of aggression he uses, he's talking about being conservative or aggressive with the hurdle and/or assumptions being made, not holding cash.  I think such a strategy makes a lot of sense (i.e., more conservative assumptions for specific investments as the pendulum moves toward greed).

 

With regard to using it for cash holding purposes, it sounds perfectly reasonable.  The problem I have, however, is that many ideas that are "reasonable" (e.g., using CAPE or other valuation metrics to move in and out of the market) are not supported by evidence in producing superior long-term results.  Basically, I'm taking the stance that there should be compelling evidence to use any particular strategy.  I feel like many of us use superstitions and gut feelings for a lot of this area of investing, which I'm not comfortable with, personally.

 

race, why do you feel there's not evidence? perhaps there isn't a ton of evidence as in a lot of observable periods. However, if one looks at Buffett's market cap to to GNP (I'm looking at dshort.com),  it looks like it's done fairly well as a predictor. After all, he's the one that said there's a should be a rational relationship  between market cap to GNP. And sure enough, when things start getting too out of whack (an outlier from recent averages), things blow up. We had big drawdowns shortly on these outliers around 1929, 1968, 2000 (not to mention 2007, which wasn't as high as 2000...but is lower than where we are now). According to dshort.com, we are now roughly 2.5 SD away from the norm.

 

I'm going to crack open your study soon, but a quick question. What were your assumptions for time periods? Thanks!

 

By the way, race, this is nothing personal towards you (I think you and liberty are much smarter than I am) but how long have you been investing? I just think lack of experience (if one started investing in 2008 or 2009) it gets them to take higher risk than we should.

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race,

 

I agree that it's impossible to time it perfectly. However, I do think there are times to be super aggressive (in times of extreme fear) or times to be super conservative (in times of extreme greed). Perhaps I'm wrong, but I think moving things slowly -as the pendulum swings - should help with overall results. Even Buffett (his personal account) and Munger were sitting in cash/bonds before 2008.

 

One thing to note with Marks--he is required to be fully invested.  When he talks about the pendulum and the corresponding amount of aggression he uses, he's talking about being conservative or aggressive with the hurdle and/or assumptions being made, not holding cash.  I think such a strategy makes a lot of sense (i.e., more conservative assumptions for specific investments as the pendulum moves toward greed).

 

With regard to using it for cash holding purposes, it sounds perfectly reasonable.  The problem I have, however, is that many ideas that are "reasonable" (e.g., using CAPE or other valuation metrics to move in and out of the market) are not supported by evidence in producing superior long-term results.  Basically, I'm taking the stance that there should be compelling evidence to use any particular strategy.  I feel like many of us use superstitions and gut feelings for a lot of this area of investing, which I'm not comfortable with, personally.

 

I don't think Marks is required to be fully invested whatsoever - that goes against everything I've ever heard about his firm and his style. Their most recent fund was specifically raised with a view towards the next default cycle. I'm sure they might have some product that is fully invested, but I am almost certain that's not true at all for the vast majority of their assets.

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race,

 

I agree that it's impossible to time it perfectly. However, I do think there are times to be super aggressive (in times of extreme fear) or times to be super conservative (in times of extreme greed). Perhaps I'm wrong, but I think moving things slowly -as the pendulum swings - should help with overall results. Even Buffett (his personal account) and Munger were sitting in cash/bonds before 2008.

 

One thing to note with Marks--he is required to be fully invested.  When he talks about the pendulum and the corresponding amount of aggression he uses, he's talking about being conservative or aggressive with the hurdle and/or assumptions being made, not holding cash.  I think such a strategy makes a lot of sense (i.e., more conservative assumptions for specific investments as the pendulum moves toward greed).

 

With regard to using it for cash holding purposes, it sounds perfectly reasonable.  The problem I have, however, is that many ideas that are "reasonable" (e.g., using CAPE or other valuation metrics to move in and out of the market) are not supported by evidence in producing superior long-term results.  Basically, I'm taking the stance that there should be compelling evidence to use any particular strategy.  I feel like many of us use superstitions and gut feelings for a lot of this area of investing, which I'm not comfortable with, personally.

 

I don't think Marks is required to be fully invested whatsoever - that goes against everything I've ever heard about his firm and his style. Their most recent fund was specifically raised with a view towards the next default cycle. I'm sure they might have some product that is fully invested, but I am almost certain that's not true at all for the vast majority of their assets.

 

Well, I watched an interview with him where he stated what I just said above--that when money is raised it must be fully invested.  I guess it is possible that he was referring to something in particular, but it didn't seem like it.  Perhaps he means it has to be fully invested when called.

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race, why do you feel there's not evidence? perhaps there isn't a ton of evidence as in a lot of observable periods. However, if one looks at Buffett's market cap to to GNP (I'm looking at dshort.com),  it looks like it's done fairly well as a predictor. After all, he's the one that said there's a should be a rational relationship  between market cap to GNP. And sure enough, when things start getting too out of whack (an outlier from recent averages), things blow up. We had big drawdowns shortly on these outliers around 1929, 1968, 2000 (not to mention 2007, which wasn't as high as 2000...but is lower than where we are now). According to dshort.com, we are now roughly 2.5 SD away from the norm.

 

I haven't seen any.  Can you show me a study that uses market cap to GNP to determine when to stay in the market and get out that outperforms?  e.g., CAPE is predictive of future returns, but it does not appear to be usable, a priori to outperform the market.  So my point is, if no one can show that whatever metric they are using to justify holding cash actually outperforms, then it is not a valid basis for holding cash.  I'm happy to be proven wrong here, but I haven't seen any evidence to the contrary.  Moreover, if it can be done based on something basic (e.g., GNP ratio, CAPE, P/E, etc.), then everyone should be doing it to outperform the market, right?  That is just the sort of thing that would be arbitraged out of the market, because it is too easy to do.  Basically, all these arguments come down to "timing the market" which is incredibly hard to do.

 

I'm going to crack open your study soon, but a quick question. What were your assumptions for time periods? Thanks!

 

I used Shiller's data from 1871-current, to avoid issues related to specific time period.  For example, there are studies that I reproduced that worked in their sample period (e.g., 1970-2001), but not out of sample.

 

By the way, race, this is nothing personal towards you (I think you and liberty are much smarter than I am) but how long have you been investing? I just think lack of experience (if one started investing in 2008 or 2009) it gets them to take higher risk than we should.

 

I'm basing my statements on historical studies, not my personal history.  I think if you read the essay you'll see what I'm saying.  However, to answer your question directly, I've been investing since 2010, and I would fully agree that if my statements were based on that period, it should not be trusted, but that's not where I base my conclusions from. 

 

 

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race,

 

thanks for the input.

 

As for the Buffett measure, here you go  (thanks to jb for finding the link in another thread)

 

http://archive.fortune.com/magazines/fortune/fortune_archive/2001/12/10/314691/index.htm

 

So, as far as I can tell, this just indicates a lower expected return at high ratios and higher expected return at low ratios, which is the same thing that CAPE predicts.  However, that doesn't mean that one can outperform the market by sitting out when the expected return is lower and getting in when it is higher.  I'm looking for someone showing that you can actually outperform the market versus staying 100% invested by using whatever metric.  That's the evidence I'm looking for, and without it, I don't really understand relying on these metrics other than getting your expectations right for what the market may return.  E.g., I agree these metrics are all high right now, and don't expect a lot out of the market going forward, but that doesn't mean that going to cash based on that expectation will actually afford me higher results.  That was why I started working on the aforementioned essay.

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That's a valid point. However, Buffett's essay also discusses profit margins and interest rates  - both are which at extreme levels. If either of these revert to long term means (perhaps neither ever will), that could make today's valuations a bit shocking. Of course, in retrospect it will be 20/20 one way or another. I simply look at it like this: We're at extreme levels on several different metrics and people aren't being as prudent as they were a few years ago. With that being said, the timing isn't perfect. These conditions could last for a long, long time. That's why I've toned down my equity exposure a little.  I've been investing for almost 20 years (I started when I was 14..although I'm still not very good). I've seen a lot (a whole lot) of crazy things happen. If someone would have predicted that "x" would happen a year before it happened, most people would have thought they were crazy. Things can get very ugly, very quickly. With that being said, I wouldn't be surprised at all if the market continued to rally for a year or two to lull people into a nice slumber. We're about the 4th longest bull market in history (and with stimulus, who knows how long it will last?) - that doesn't mean it will end anytime soon, but it does mean we're getting into rare waters.

 

http://money.cnn.com/2014/03/06/investing/bull-market-five-years/

 

One other point to consider: let's say history happened in a different way. For instance the bailout failed congress the second time around and never passed. Any idea how that might have changed your results (or perhaps you've already looked at that)?

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Hasn't he recently stated that he doesn't think the market is overvalued today.  He is pretty frank when he thinks the market is overvalued.  This in my mind carries more weight than the use of one of the indicators he has used in the past.

 

Packer

 

Packer, you are correct in that he doesn't say the market is overvalued. He even talked about buying on the most recent dip. However, even in 1999 he was still predicting roughly 6% returns (after fees).

 

His personal money he runs a lot differently though. In his essay "Buy American. I Am" he talked about how he owned nothing but government bonds until Oct 2008 (I'm assuming).

 

"So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities."

 

However, according to this, he wasn't too worried in 2007 either:

 

http://www.marketwatch.com/story/buffett-says-subprime-crisis-not-a-big-threat-to-us-economy

 

Kinda weird that he'd have all bonds given he didn't see the subprime crisis hitting.

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One other point to consider: let's say history happened in a different way. For instance the bailout failed congress the second time around and never passed. Any idea how that might have changed your results (or perhaps you've already looked at that)?

 

Can't really address alternate histories.  I'm just seeing if using these metrics could be used to outperform the market using actual events, over a long time-period.

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Packer, you are correct in that he doesn't say the

His personal money he runs a lot differently though. In his essay "Buy American. I Am" he talked about how he owned nothing but government bonds until Oct 2008 (I'm assuming).

 

"So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities."

 

However, according to this, he wasn't too worried in 2007 either:

 

http://www.marketwatch.com/story/buffett-says-subprime-crisis-not-a-big-threat-to-us-economy

 

Kinda weird that he'd have all bonds given he didn't see the subprime crisis hitting.

 

His personal money is run differently probably out of neglect. It's insignificant compared to his Berkshire holdings. It's not his life's work, his passion, his canvas, his legacy... I wouldn't read too much into how he runs his PA, as I doubt that's where his real efforts go. Maybe it was interesting when he was starting it and building it from nothing to millions, but now that it's more than enough to pay for his lifestyle (and more), it's probably not top of mind.

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race, why do you feel there's not evidence? perhaps there isn't a ton of evidence as in a lot of observable periods. However, if one looks at Buffett's market cap to to GNP (I'm looking at dshort.com),  it looks like it's done fairly well as a predictor. After all, he's the one that said there's a should be a rational relationship  between market cap to GNP. And sure enough, when things start getting too out of whack (an outlier from recent averages), things blow up. We had big drawdowns shortly on these outliers around 1929, 1968, 2000 (not to mention 2007, which wasn't as high as 2000...but is lower than where we are now). According to dshort.com, we are now roughly 2.5 SD away from the norm.

 

I haven't seen any.  Can you show me a study that uses market cap to GNP to determine when to stay in the market and get out that outperforms?  e.g., CAPE is predictive of future returns, but it does not appear to be usable, a priori to outperform the market.  So my point is, if no one can show that whatever metric they are using to justify holding cash actually outperforms, then it is not a valid basis for holding cash.  I'm happy to be proven wrong here, but I haven't seen any evidence to the contrary.  Moreover, if it can be done based on something basic (e.g., GNP ratio, CAPE, P/E, etc.), then everyone should be doing it to outperform the market, right?  That is just the sort of thing that would be arbitraged out of the market, because it is too easy to do.  Basically, all these arguments come down to "timing the market" which is incredibly hard to do.

 

I'm going to crack open your study soon, but a quick question. What were your assumptions for time periods? Thanks!

 

I used Shiller's data from 1871-current, to avoid issues related to specific time period.  For example, there are studies that I reproduced that worked in their sample period (e.g., 1970-2001), but not out of sample.

 

By the way, race, this is nothing personal towards you (I think you and liberty are much smarter than I am) but how long have you been investing? I just think lack of experience (if one started investing in 2008 or 2009) it gets them to take higher risk than we should.

 

I'm basing my statements on historical studies, not my personal history.  I think if you read the essay you'll see what I'm saying.  However, to answer your question directly, I've been investing since 2010, and I would fully agree that if my statements were based on that period, it should not be trusted, but that's not where I base my conclusions from.

 

Is it safe to summarize your study as saying market timing does not work with the exception you mentioned as active investors with extreme volatility?

 

I apologize for asking this question before reading your report in detail. I took a quick look and it is very impressive.

 

Vinod

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Is it safe to summarize your study as saying market timing does not work with the exception you mentioned as active investors with extreme volatility?

 

I apologize for asking this question before reading your report in detail. I took a quick look and it is very impressive.

 

Vinod

 

Yes, that's pretty much my conclusion.  It also does some other tests besides market timing (e.g., hypothetical and real investor testing to determine ideal amounts of cash for non-market portfolios).

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Is it safe to summarize your study as saying market timing does not work with the exception you mentioned as active investors with extreme volatility?

 

I apologize for asking this question before reading your report in detail. I took a quick look and it is very impressive.

 

Vinod

 

Yes, that's pretty much my conclusion.  It also does some other tests besides market timing (e.g., hypothetical and real investor testing to determine ideal amounts of cash for non-market portfolios).

 

Thank you!

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race,

 

I agree that it's impossible to time it perfectly. However, I do think there are times to be super aggressive (in times of extreme fear) or times to be super conservative (in times of extreme greed). Perhaps I'm wrong, but I think moving things slowly -as the pendulum swings - should help with overall results. Even Buffett (his personal account) and Munger were sitting in cash/bonds before 2008.

 

One thing to note with Marks--he is required to be fully invested.  When he talks about the pendulum and the corresponding amount of aggression he uses, he's talking about being conservative or aggressive with the hurdle and/or assumptions being made, not holding cash.  I think such a strategy makes a lot of sense (i.e., more conservative assumptions for specific investments as the pendulum moves toward greed).

 

With regard to using it for cash holding purposes, it sounds perfectly reasonable.  The problem I have, however, is that many ideas that are "reasonable" (e.g., using CAPE or other valuation metrics to move in and out of the market) are not supported by evidence in producing superior long-term results.  Basically, I'm taking the stance that there should be compelling evidence to use any particular strategy.  I feel like many of us use superstitions and gut feelings for a lot of this area of investing, which I'm not comfortable with, personally.

 

I don't think Marks is required to be fully invested whatsoever - that goes against everything I've ever heard about his firm and his style. Their most recent fund was specifically raised with a view towards the next default cycle. I'm sure they might have some product that is fully invested, but I am almost certain that's not true at all for the vast majority of their assets.

 

Well, I watched an interview with him where he stated what I just said above--that when money is raised it must be fully invested.  I guess it is possible that he was referring to something in particular, but it didn't seem like it.  Perhaps he means it has to be fully invested when called.

 

Here he is saying basically the opposite of that.

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Across my various accounts (qualified and non-qualified), I'm probably about 50% cash.  I think I made a mistake by selling two of my favorite businesses in late 2012 (GGG and BRK.B).  They made up a significant portion of my holdings at that time.  I partially sold them for tax reasons.  Looking back, I think it was the wrong decision.  Both of these companies should have stayed in my portfolio as permanent holdings.  They will compound for years to come.  Now I have to wait until they are available at much more attractive prices (which could be a long while).  Meanwhile, my cash sits earning nothing.

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Well, I watched an interview with him where he stated what I just said above--that when money is raised it must be fully invested.  I guess it is possible that he was referring to something in particular, but it didn't seem like it.  Perhaps he means it has to be fully invested when called.

 

Here he is saying basically the opposite of that.

 

So, in that interview, he was giving general advice to investors, not stating what he does with his funds.  In the interview I watched before (which I can't find now, unfortunately), the hosts basically asked him how he used the pendulum and he said that they were always fully invested (maybe referring to high yield funds) as that was the mandate of the fund, so they used the pendulum to determine aggressiveness in what they were buying. 

 

Regardless, thanks for the video, I'd not heard him actually give advice to stock pickers like that.  However, I don't think holding cash based on the temperature of the market is a great idea, for a variety of reasons.  I do think understanding the pendulum is important, however; e.g., I like a strategy similar to Marks' comments about aggressiveness and defensiveness in picking stocks with his own funds above.

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Across my various accounts (qualified and non-qualified), I'm probably about 50% cash.  I think I made a mistake by selling two of my favorite businesses in late 2012 (GGG and BRK.B).  They made up a significant portion of my holdings at that time.  I partially sold them for tax reasons.  Looking back, I think it was the wrong decision.  Both of these companies should have stayed in my portfolio as permanent holdings.  They will compound for years to come.  Now I have to wait until they are available at much more attractive prices (which could be a long while).  Meanwhile, my cash sits earning nothing.

 

Unless there are specific tax reasons, why not buy them back at current prices if you wanted to keep them as permanent holdings? If I understand the jist of your post correctly you wouldn't sell them either at current prices if you still had them.

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In current rate situation, bonds are not obviously better than cash unless we talk about short-term bonds held to maturity. Very few people hold actual short-term bonds to maturity. So the roboguys are actually suggesting that bond funds are better than cash. This is a bond market call at the time of super low bond rates and not necessarily true.

 

So suggesting someone to hold cash instead of bond funds is not automatically stupid. It might be quite smart for some possible scenarios.

 

Shannon strategy would make money, but so would a stock/bond-rebalancing portfolio. In normal times when bond rates are rather high, stock/bond-rebalancing portfolio is likely to outperform Shannon stock/cash-rebalancing portfolio handily. However, currently, that might not be true.

 

I like Graham's suggestion of 50/50% stocks/bonds up to 75/25% stocks/bonds with a twist that now I'd go for 75/25% stocks/cash unless the investor is enterprising enough to pick their own bonds and their maturities accordingly. This is what I suggest to my non-stock picking friends when they ask. :)

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Across my various accounts (qualified and non-qualified), I'm probably about 50% cash.  I think I made a mistake by selling two of my favorite businesses in late 2012 (GGG and BRK.B).  They made up a significant portion of my holdings at that time.  I partially sold them for tax reasons.  Looking back, I think it was the wrong decision.  Both of these companies should have stayed in my portfolio as permanent holdings.  They will compound for years to come.  Now I have to wait until they are available at much more attractive prices (which could be a long while).  Meanwhile, my cash sits earning nothing.

Textbook example of mental biases at work here... you don't correct one mistake by making another.

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