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buying large cap value stocks as cash and cash equivalents?


jawn619
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Those 3 stocks are currently at 14x, 6x and 10x book value. That should be a clue to you that they will not behave anything like cash.

 

If you substituted Berkshire, some insurers, utilities, REITs, I still don't think those are reasonable substitutes for cash. But at least people wouldn't laugh at that question.

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From the Pabrai Funds 2012 Annual Meeting (question from an individual shareholder, answer by Mohnish Pabrai):

 

(bold emphasis mine)

 

Q: And the second question is, could you tell us a little bit of what you think about how much cash you hold? I know at one time you held Berkshire as a proxy for cash. How do you decide how much cash you want to hold at any time?

 

A: I used to own Berkshire stock as a proxy for cash and that was a mistake. During times of distress, everything will go down including Berkshire. In fact, Charlie Munger will tell you that there have been 3 or 4 times in their careers where they have gone top to bottom - down over 50% in Berkshire stock. Even Berkshire - even though it’s in the long-term a great business, is subject to gyrations in the short-term. Specifically, if you have a global macro distress like a 9/11 type event, or the Lehman crisis, everything is going to go down. At that point in time, it was a mistake to have Berkshire versus cash. The one change I made is that I do not want to chase those returns to collect some marginal returns that I might get by owning Berkshire. I’d rather have the cash completely available for us to act when we need to. Now, for example, if you look at the funds today, we have about $545 million. We have about $110 million in cash. If we go through a period where there’s a significant drop in equity markets, that $110 million becomes almost priceless. For example, in the fourth quarter of 2008, when we had severe distress, we were sitting close to zero cash. It was not possible for me to easily take advantage of the market. Anything I made in investments at that time went up significantly. The average investment went up 2 or 3 times from  where we bought. I want to have the ability to have the dry powder at all times and I like the cash cushion.

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Jawn, I didn't mean to be a dick, but based on my understanding of your investing acumen, I really didn't think that was serious. Here's one of your recent comments:

 

I would pay 3-4x EV/EBITDA. Anything much higher I feel like doesn't have a large enough MOS. Currently it's trading at 1.1B EV with "expected" ebitda of 150mish. That's about a 6x multiple, double what I'd be willing to pay.

 

Now that's a value investor :) So how does your idea of MOS conform with the names (and prices at which they're trading) you mentioned?

 

At times like this, it's probably worthwhile to spend more time reflecting on what the downside could look like rather than why a purportedly stable business is a reasonable cash proxy.

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Large cap stocks never go down.  They never cut their dividends either.  Large cap investors are 100% rational and never sell their shares in a panic.

 

Can't wait for "Guys think it's safe for me to park my money in Franky and Pauly's Biotech-o-rama stock with a $2m mcap?  Seems pretty safe to me, plus they're on the verge of a break though.  Safety and riches rolled into one!"

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Large cap stocks never go down.  They never cut their dividends either.  Large cap investors are 100% rational and never sell their shares in a panic.

 

Can't wait for "Guys think it's safe for me to park my money in Franky and Pauly's Biotech-o-rama stock with a $2m mcap?  Seems pretty safe to me, plus they're on the verge of a break though.  Safety and riches rolled into one!"

 

That's actually not far from the rationale of this recent VIC writeup:

 

http://www.valueinvestorsclub.com/idea/DYNAVAX_TECHNOLOGIES_CORP/136432

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Large cap stocks never go down.  They never cut their dividends either.  Large cap investors are 100% rational and never sell their shares in a panic.

 

Ha, yes. I'm amazed by the amount of people here that are so bullish on BAC for example that they are willing to buy calls at this point (excluding those like Ericopoly that use strategies for downside protection). What is so attractive about buying a large cap stock at what might be 75% of IV at best? Do they think Mr. Market is so irrational for so long? It was an absolute bargain under $7 thanks to temporary irrationality and fear and yet almost no one was buying it back then.

Sure BAC could rise a lot from here the next few years, but how likely is it to outperform the index? Imo more a matter of a rising tide lifting all boats at this point. BAC could do better than the market currently expects and the stock could explode but so could any other company. I don't believe Mr Market is so irrational that they can't see past a few years of troubles, especially in this market.

The thing is, even if you are right, you are barely rewarded with outperformance in the common stock. Is that why some are reaching for calls?

 

 

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Large cap stocks never go down.  They never cut their dividends either.  Large cap investors are 100% rational and never sell their shares in a panic.

 

Ha, yes. I'm amazed by the amount of people here that are so bullish on BAC for example that they are willing to buy calls at this point (excluding those like Ericopoly that use strategies for downside protection). What is so attractive about buying a large cap stock at what might be 75% of IV at best? Do they think Mr. Market is so irrational for so long? It was an absolute bargain under $7 thanks to temporary irrationality and fear and yet almost no one was buying it back then.

Sure BAC could rise a lot from here the next few years, but how likely is it to outperform the index? Imo more a matter of a rising tide lifting all boats at this point. BAC could do better than the market currently expects and the stock could explode but so could any other company. I don't believe Mr Market is so irrational that they can't see past a few years of troubles, especially in this market.

The thing is, even if you are right, you are barely rewarded with outperformance in the common stock. Is that why some are reaching for calls?

 

Thanks for this comment.  I have been selling my BAC calls for months now.  This just crystallizes why I was doing it. 

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Large cap stocks never go down.  They never cut their dividends either.  Large cap investors are 100% rational and never sell their shares in a panic.

 

Can't wait for "Guys think it's safe for me to park my money in Franky and Pauly's Biotech-o-rama stock with a $2m mcap?  Seems pretty safe to me, plus they're on the verge of a break though.  Safety and riches rolled into one!"

 

I am wondering what the board traffic will be like when we have a major correction in the markets.  My guess is it will be very quiet. 

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Large cap stocks never go down.  They never cut their dividends either.  Large cap investors are 100% rational and never sell their shares in a panic.

 

Can't wait for "Guys think it's safe for me to park my money in Franky and Pauly's Biotech-o-rama stock with a $2m mcap?  Seems pretty safe to me, plus they're on the verge of a break though.  Safety and riches rolled into one!"

 

I am wondering what the board traffic will be like when we have a major correction in the markets.  My guess is it will be very quiet.

 

I think the opposite. I think it will be just as loud but the tone will just be negative.

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I absolutely despise cash as a store of value.

 

Having said this, I'm inclined to sell more and more of my holdings (due to rising prices) but having difficulties finding replacements. Maybe I should start selling and holding cash :(

 

 

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Large cap stocks never go down.  They never cut their dividends either.  Large cap investors are 100% rational and never sell their shares in a panic.

 

Can't wait for "Guys think it's safe for me to park my money in Franky and Pauly's Biotech-o-rama stock with a $2m mcap?  Seems pretty safe to me, plus they're on the verge of a break though.  Safety and riches rolled into one!"

 

I am wondering what the board traffic will be like when we have a major correction in the markets.  My guess is it will be very quiet.

 

I think the opposite. I think it will be just as loud but the tone will just be negative.

 

I agree, much thrashing and predictions of the S&P crashing to 25% or 50% whatever the current amount is.  If we get S&P 1000 there will be convincing bearish calls for 500.

 

Posters will of course have "no ideas" because everything is falling and no one will want to catch the proverbial falling knife.  Yet for those who can just tune out the noise there will be plenty of opportunities.

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Large cap stocks never go down.  They never cut their dividends either.  Large cap investors are 100% rational and never sell their shares in a panic.

 

Can't wait for "Guys think it's safe for me to park my money in Franky and Pauly's Biotech-o-rama stock with a $2m mcap?  Seems pretty safe to me, plus they're on the verge of a break though.  Safety and riches rolled into one!"

 

I am wondering what the board traffic will be like when we have a major correction in the markets.  My guess is it will be very quiet.

 

I think the opposite. I think it will be just as loud but the tone will just be negative.

 

I agree, much thrashing and predictions of the S&P crashing to 25% or 50% whatever the current amount is.  If we get S&P 1000 there will be convincing bearish calls for 500.

 

Posters will of course have "no ideas" because everything is falling and no one will want to catch the proverbial falling knife.  Yet for those who can just tune out the noise there will be plenty of opportunities.

 

Do you really think the FED will sit by and do nothing while the market corrects 50%?  No, the FED will move to "protect" the economy and this why investors are developing a "the market will never fall" mentality.

 

my $0.02

 

cheers

Zorro

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Large cap stocks never go down.  They never cut their dividends either.  Large cap investors are 100% rational and never sell their shares in a panic.

 

Can't wait for "Guys think it's safe for me to park my money in Franky and Pauly's Biotech-o-rama stock with a $2m mcap?  Seems pretty safe to me, plus they're on the verge of a break though.  Safety and riches rolled into one!"

 

I am wondering what the board traffic will be like when we have a major correction in the markets.  My guess is it will be very quiet.

 

I think the opposite. I think it will be just as loud but the tone will just be negative.

 

Go look at the oil & gas threads

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Large cap stocks never go down.  They never cut their dividends either.  Large cap investors are 100% rational and never sell their shares in a panic.

 

Can't wait for "Guys think it's safe for me to park my money in Franky and Pauly's Biotech-o-rama stock with a $2m mcap?  Seems pretty safe to me, plus they're on the verge of a break though.  Safety and riches rolled into one!"

 

I am wondering what the board traffic will be like when we have a major correction in the markets.  My guess is it will be very quiet.

 

I think the opposite. I think it will be just as loud but the tone will just be negative.

 

Go look at the oil & gas threads

 

I don't really invest in oil & gas, so I don't follow those threads. Are you suggesting that those threads have gone dark and are now quiet?

 

Also, I suspect that there might be some difference between one sector having a correction and a market-wide correction... we will probably get the chance to find out if I'm right in the next decade or so.

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Large cap stocks never go down.  They never cut their dividends either.  Large cap investors are 100% rational and never sell their shares in a panic.

 

Ha, yes. I'm amazed by the amount of people here that are so bullish on BAC for example that they are willing to buy calls at this point (excluding those like Ericopoly that use strategies for downside protection). What is so attractive about buying a large cap stock at what might be 75% of IV at best? Do they think Mr. Market is so irrational for so long? It was an absolute bargain under $7 thanks to temporary irrationality and fear and yet almost no one was buying it back then.

Sure BAC could rise a lot from here the next few years, but how likely is it to outperform the index? Imo more a matter of a rising tide lifting all boats at this point. BAC could do better than the market currently expects and the stock could explode but so could any other company. I don't believe Mr Market is so irrational that they can't see past a few years of troubles, especially in this market.

The thing is, even if you are right, you are barely rewarded with outperformance in the common stock. Is that why some are reaching for calls?

 

Thanks for this comment.  I have been selling my BAC calls for months now.  This just crystallizes why I was doing it.

 

Not sure if this is helpful, but having looked at BAC and GM at a (very) high level, I liked the idea of Valeant LEAPS better than BAC or GM. I believe they have the potential (though not certainty) of doubling share value every 3 years. So, that's +40% every 18 months which is about the average duration of a call LEAP when you consider the rolling period every year. Though the LEAPS are more expensive than BAC, the continual potential upside is also greater.

 

I bought the Valeant LEAPS because there is also risk in owning the common as they are highly levered and any mishap with an acquisition could send them into a 1999-2006 Fairfax type slump in the stock price. (Having said that, I think the odds of that happening are lower than a company buying two fixer upper insurance subsidiaries at once on high leverage.)

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Also related, I looked at Berkshire LEAPS really hard but decided against - too tied to the economy, maybe a little like BAC - maybe the common of both is better over the long-term...but of course the return on investment with the common will be far lower than with the LEAPS.

 

In a slow growth economy with central bankers manipulating the bond markets, unless there is a total blow-up in high yield, Valeant is much less tied to the economy, its business growth is very high and pretty independent of economic growth relative to Berkshire and BAC and GM.

 

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Do you really think the FED will sit by and do nothing while the market corrects 50%?  No, the FED will move to "protect" the economy and this why investors are developing a "the market will never fall" mentality.

 

my $0.02

 

cheers

Zorro

 

Why didn't this logic hold when the market fell 50% in 2007-09?

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Thanks for all the input guys. My ego just took a thrashing from all the comments but i definitely learned a lesson. I'm also glad that I'm not the only one to make this mistake.

 

I'll give some more specifics on my situation and my general line of thinking was this...

 

I spend most of my time looking at the world of micro cap stocks with less than $1B in market cap. Some are under $50-100M. I am running out of ideas and ideas are harder to come by.

 

Large caps are generally more liquid and less volatile than the micro caps i'm looking at. There are also less opportunities in this space. I am not trying to hold these for an extended period of time but generally still think some are undervalued (GM/IBM/AAPL a year ago).

 

I want to use a real example. I own GM and am up over 10% in it and am treating it kind of like a cash equivalent... I'm trying to look for undervalued opportunities but while I wait, I'm happy to have cash in GM.

 

I never said that large caps can't go down, that large caps are safe, that large caps investors are smart. I'm saying large caps are more liquid and in my mind they were better than holding cash. I'm sure it might be just me trying to justify a need for action when there aren't opportunities and chase marginal returns owning undervalued large caps. Definitely changing my tune but thanks for all the thoughts.

 

 

 

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Most of my portfolio is large caps (I am not a good microcap investor - or maybe not a good investor period  8) ).

 

I have no illusions though that they will drop if market drops, even BRK and FRFHF. So I think there are OK large caps to invest into, but they are definitely not cash.

 

Maybe that's what you are saying too. ;)

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Thanks for all the input guys. My ego just took a thrashing from all the comments but i definitely learned a lesson. I'm also glad that I'm not the only one to make this mistake.

 

I'll give some more specifics on my situation and my general line of thinking was this...

 

I spend most of my time looking at the world of micro cap stocks with less than $1B in market cap. Some are under $50-100M. I am running out of ideas and ideas are harder to come by.

 

Large caps are generally more liquid and less volatile than the micro caps i'm looking at. There are also less opportunities in this space. I am not trying to hold these for an extended period of time but generally still think some are undervalued (GM/IBM/AAPL a year ago).

 

I want to use a real example. I own GM and am up over 10% in it and am treating it kind of like a cash equivalent... I'm trying to look for undervalued opportunities but while I wait, I'm happy to have cash in GM.

 

I never said that large caps can't go down, that large caps are safe, that large caps investors are smart. I'm saying large caps are more liquid and in my mind they were better than holding cash. I'm sure it might be just me trying to justify a need for action when there aren't opportunities and chase marginal returns owning undervalued large caps. Definitely changing my tune but thanks for all the thoughts.

 

 

You want to separate "liquidity" from "holding its price." There are many stocks with liquidity (meaning the ability to be sold quickly) that would still suffer price-wise when people are throwing the baby out with the bath water.

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