Your Current Cash weighting

[Munger]

I love this quote, its one I reach for when my knees get a bit wobbly - Warren Buffett - "An argument is made that there are just too many question marks about the near future; wouldn't it be better to wait until things clear up a bit? You know the prose: “Maintain buying reserves until current uncertainties are resolved,” etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear and you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values."

 

 

Let's remember that Buffett moved entirely to cash in the late 60's/early 70's -- brilliant move. 

 

If you find a great company with a strong balance that Mr. Market is offering to you at a very low valuation (i.e., very high margin of safety), buy boatloads of the stock regardless of the macro -- otherwise, be careful my friends.

[Munger]

And still surprised that Prem eliminating essentially all exposure to stocks on a net basis has not gotten more mention on this board.

[Myth465]

And still surprised that Prem eliminating essentially all exposure to stocks on a net basis has not gotten more mention on this board.

 

There was a very long discussion on it actually.

 

myth465, your Buffett quote below rattles around in my head quite a bit. Lynch has some great ones as well about the foolishness of trying to time the markets (I like to re-read One Up On Wall Street about every second year because I like Lynch's stuff so much).

 

What gives me pause is the chance we are entering a 'US in the 30's' or 'Japan in the 90's' type slowdown (not necessarily another great depression; perhaps just a decade long absence of growth that rewards bonds and punishes equities as earnings shrink).

 

I do not want to end up like Ben Graham in the early 30's; I want to keep what I got (as I almost got enough)! If I was younger, with a small base and adding to my capital every year in a big way then I likely would be more fully invested. Today I am 13% equities and 87% cash (having recently sold a chunk of equities); about 25% of my portfolio is US$; 75% is CAN$.

 

Agreed, I think we are in for some painfully lean years. Like Buffett I dont think the world will fall apart, but agree with you that we are in for a rough ride that will throw up plenty of bargains. Most of my chips are on the table and I am adding to my cash pile each day via salary, I dont have nearly enough, but will be looking to take money off the table over the next few weeks. Im 20% cash, maybe 25% now.

 

If you guys think being in Cash today is trying to time the market then we are worlds apart.

 

Its a wise move to be out of the market when its high or about to crash, but it is timing the market.

[Cardboard]

Myth,

 

We have been through the valley of death together with ATSG. I don't intend to pick on you, but look at some of your current holdings that you have discussed on the board: ATSG, KSP, SSW, SD. What happens to them if we have a recession or oil goes back to $30? They are all heavily levered companies and highly dependant on a strong economy. They are pretty agressive stocks and if things get nasty enough, it is not just temporary stock losses that may occur. They have assets, but what will they get for them in a major downturn if they need cash?

 

That is a reason why I am worried because the value is now in places where there is major risk. Low risk, high reward has mostly disappeared.

 

Cardboard

[Myth465]

Myth,

 

We have been through the valley of death together with ATSG. I don't intend to pick on you, but look at some of your current holdings that you have discussed on the board: ATSG, KSP, SSW, SD. What happens to them if we have a recession or oil goes back to $30? They are all heavily levered companies and highly dependant on a strong economy. They are pretty agressive stocks and if things get nasty enough, it is not just temporary stock losses that may occur. They have assets, but what will they get for them in a major downturn if they need cash?

 

That is a reason why I am worried because the value is now in places where there is major risk. Low risk, high reward has mostly disappeared.

 

Cardboard

 

Cardboard I wholeheartedly agree with your assessment. I think the US is due for a rude awakening and that will cause severe pain in just about all sectors. I have been raising cash by swapping to leaps / long dated options, and so far its been the prudent move. It worked out very well with ATSG, and allowed me to raise significant capital. I dont really think one will find true safety (outside of cash and hedging), and also find the large cap discussion very dubious. A raising tide will rise all boats, and just the opposite will happen with a downturn.

 

With that said I just cant sell everything and hide under a rock. It just rubs me the wrong way. I plan to sell some oil and gas holdings once the moratorium lifts, and my cash horde will grow with every pay check. I will keep my 70% - 75% in the market because 30% - 40% of it is with good owner managers (LRE, FUR, L) and they tend to invest counter cyclically also. SSW was in that boat, but they seem to have gotten aggressive which I dont really like. SD is an asset play and for it to work out they have to perform and keep the hedges rolling out as production raises. You have a point though, they have to do this now before we get a massive pullback in oil. KSP has my scratching my head. I am looking forward to seeing what Management announces come 8/31, a small dividend and debt repayment would be a good course, but who knows in this market.

 

Interesting times, over the last few months I have learned things are never as good as they seem when times are good, and are rarely has bad as they seem when times are bad. I think we are in for a rough ride. Everyone here at least knew there was no green shoots, and jobs werent coming.

[twacowfca]

omagh,  you just mentioned something simple, objective, yet profound!  Private market values are higher than stock market values for many companies that have conservative valuations.  That's a reality check on valuations.  However, we should be mindful that market prices could change if US taxes do increase next year as expected.  And inflation and associated tightening is a future risk when the economy eventually moves out of the doldrums.

 

I'm curious.  Would you be so kind as to share the names of the companies you held that were takeouts in the last 18 months, and also share your reasons for buying them?

[omagh]

Twacowfca,

 

Mostly small caps except ORH:

- Cossette - taken private by private capital group plus operating team

- Tundra Semiconductor - bought by Gennum

- Odyssey Re - bought by Fairfax

- Western Sizzlin - bought by Steak'n'Shake/Biglari

- Samuel ManuTech - taken private by owner family

 

Most of these were bought or added to significantly during the October 2008 - March 2009 period.  I have 2 additional positions (won't disclose) that are closely held which may also get taken private.  Why did I buy?  Mostly these are well-run ops with low-capital needs and with significant owner operators that are able to generate good returns on equity or good returns on invested capital.  When you start paying book or less than book for decent operators with a track record, the margin of safety is obvious and reversion to the mean is an expectation with uncertain timing.  In baseball terms, these are singles and doubles that keep adding to the score.

 

- O

 

omagh,  you just mentioned something simple, objective, yet profound!  Private market values are higher than stock market values for many companies that have conservative valuations.  That's a reality check on valuations.  However, we should be mindful that market prices could change if US taxes do increase next year as expected.  And inflation and associated tightening is a future risk when the economy eventually moves out of the doldrums.

 

I'm curious.  Would you be so kind as to share the names of the companies you held that were takeouts in the last 18 months, and also share your reasons for buying them?

[uncommonprofits]

Let's remember that Buffett moved entirely to cash in the late 60's/early 70's -- brilliant move. 

 

The period in which you are referring had stocks yielding around 5.5 - 6.5% - per S&P 500:

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm

 

Meanwhile you could get the same or even better yield from a safer 10 year bond - as they were yielding 6-8%:

http://finance.yahoo.com/echarts?s=^TNX+Interactive#symbol=%5ETNX;range=my

 

That same 10 year government bond today is yielding 2.5%.  Stocks might not be real cheap on an absolute basis -- but on a relative basis they are not trading at a PE of 40 to match the current 10 year bond yield.  This is Not at all similar to the late 60's/early 70's.  We had that situation in the late 90's -- but not now. 

 

I continue to believe that there is risk we are entering a similar period as the 40's where bond yields incurred negative real returns for almost a decade.  I can imagine there was plenty of fear in the markets while the world went to war in the first half of that decade (perhaps escalating on and after Dec 7, 1941).  In the second half of the decade one can well imagine the fear about how the bills would get paid.  Incidentally the 2nd edition of Security Analysis was published at the beginning of that decade ..... what is taught in that book is just as viable now as it was then. 

[rmitz]

I love this quote, its one I reach for when my knees get a bit wobbly - Warren Buffett - "An argument is made that there are just too many question marks about the near future; wouldn't it be better to wait until things clear up a bit? You know the prose: “Maintain buying reserves until current uncertainties are resolved,” etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear and you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values."

 

 

Let's remember that Buffett moved entirely to cash in the late 60's/early 70's -- brilliant move.  

 

Well, except he didn't do that.  He was in Berkshire at that point, and that was the vast majority of his holdings.  And lest you think that's misleading, he was also actively investing from within Berkshire at that point.

[Munger]

No -- he pulled completely out of the market...well known fact by anyone who has spent the time to study Buffett.

[omagh]

ucp/dd,

If that's the case, then common stocks are probably range-bound.  Since this is a thread on cash weighting, it points to the essential need for cash as a portfolio component for opportunistic purchases of individual common stocks when valuations shift to the lower end. 

 

What I see Watsa doing with hedges is protecting for directional shifts within the range, but using tools other than cash.  Obviously with an insurance portfolio, there are payout concerns which can cause temporary upset to the Fairfax portfolio, but an individual can sustain the temporary upset provided there is no recourse leverage used and there is no permanent impairment of capital when market pricing reverts to intrinsic value.

 

BTW: good essay posted today by Montier on mean reversion.  http://behaviouralinvesting.blogspot.com/2010/08/reports-of-death-of-mean-reversion-are.html

 

-O

 

I continue to believe that there is risk we are entering a similar period as the 40's where bond yields incurred negative real returns for almost a decade.  I can imagine there was plenty of fear in the markets while the world went to war in the first half of that decade (perhaps escalating on and after Dec 7, 1941).  In the second half of the decade one can well imagine the fear about how the bills would get paid.  Incidentally the 2nd edition of Security Analysis was published at the beginning of that decade ..... what is taught in that book is just as viable now as it was then. 

[omagh]

twacowfca,

 

To reply to your other part, private market values don't appear to be rising significantly.  What I have found is that markets are achieving stability with firming revenues and margins.  In the case of Samuel ManuTech, the bottom fell out and writeoffs ensued.  But once revenues firmed, margins returned and the private market valuation went back up.  When the market didn't fully respond, it made it easier for the founding family to get access to capital to take it private.  At the takeout price, it's still below a 10-year P/E multiple.

 

If my tiny sample of 5 takeouts is any guide, 4 occurred in 2009 and 1 in 2010, so the availability of opportunities is scarcer.  Investing in small cap minority positions can be painful if the takeout price is below intrinsic value, where sometimes there is a captive board that benefits from the low takeout price and there's little recourse for the minority shareholders.    Small caps are not for everyone since stocks can trade below intrinsic for years and not trade even a single share in a week, but you can make good returns if you're patient and stick to your valuation knitting.

 

As Sanjeev pointed out earlier this week, there are nuggets out there where good companies are trading below conservatively valued book (i.e. likely getting close to liquidation value - a whole art in itself) with good cashflows, little debt and low capital needs.

 

On tax increases -- agree, but hopefully minor.  On inflation, disagree; best to be in common stocks which have some hope of gross contribution margin increases and perform better overall than other investment classes in inflationary markets.

 

-O

 

omagh,  you just mentioned something simple, objective, yet profound!  Private market values are higher than stock market values for many companies that have conservative valuations.  That's a reality check on valuations.  However, we should be mindful that market prices could change if US taxes do increase next year as expected.  And inflation and associated tightening is a future risk when the economy eventually moves out of the doldrums.

[uncommonprofits]

ucp/dd,

If that's the case, then common stocks are probably range-bound.  Since this is a thread on cash weighting, it points to the essential need for cash as a portfolio component for opportunistic purchases of individual common stocks when valuations shift to the lower end. 

 

O

Without a doubt this is a range bound market - it has been since about '98 - so thats about 12.5 years of being range bound.  Buffett and many others say these things go on for about 17 years -- so perhaps we have another 4.5 years of this.  Who knows maybe this time it will be 25 years instead of 17 and we are only half way through this.  But the main thing that happens when markets become range bound is PE's shrink.  So I agree with having some cash on hand to buy stock when the PE's shrink to where one thinks will be the bottom; however, if you can find stocks where you think the valuation has already shrunk to below where the bottom PE ratio will be --- why not buy if you find the opportunity.  The trick is finding the individual stocks - but they are out there particularly the small/microcap stuff.  Even at the height of the tech bubble in 2000 there were lots of opportunities - situations which rose while the overall market fell.  I don't remember the exact words but Peter Cundill once put it this way -- that a bear market has a way of causing equilibrium in stock valuations.  I have raised my cash levels only slightly to about 5% (much of this is currently placed into a couple of thinly traded bids).  I have another 5% in high certainty workouts that I anticipate should produce cash in the next 12 or so months... if anything I would like to increase the later portion of my portfolio some. 

 

The bottom line is no one knows where the bottom or top of any range is going to be - but we could hazard a guess that the ultimate bottom will come in between around 6.5-10x PE.  My aim is to buy well below this range as much as possible - or in fix-up situations where one is buying in at least half of this range on earnings a few years out - or at some sense of bottom book value ratios where applicable. 

 

[SharperDingaan]

 

You might want to ask that when you're range bound, why is it not better to be out entirely?

P/E shrinkage, a falling market tide, and any kind of sudden panic work in your favour - & most would argue that over the forseeable future a market fall is more likely than a rise.

 

SD

[Christopher1]

No -- he pulled completely out of the market...well known fact by anyone who has spent the time to study Buffett.

 

From BPL letters and the Snowball is clear that Warren distributed to himself shares of BRK, DRC and Blue Chip Stamps. So he was completely invested even if he closed his partnership.

 

Regards

[bookie71]

 

From BPL letters and the Snowball is clear that Warren distributed to himself shares of BRK, DRC and Blue Chip Stamps. So he was completely invested even if he closed his partnership.

 

But didn't he give his partners first choice and he took what was left?

[Christopher1]

Right,

Buffett gave the first choice to his partners, I need to re-read the Snowball for the correct numbers, but I remember that the majority of the partners took cash and invested with Bill Ruane or Bond as suggested by the same Buffett. So he was left with the shares.

 

Regards

[twacowfca]

No -- he pulled completely out of the market...well known fact by anyone who has spent the time to study Buffett.

 

From BPL letters and the Snowball is clear that Warren distributed to himself shares of BRK, DRC and Blue Chip Stamps. So he was completely invested even if he closed his partnership.

 

Regards

 

I think it's a little bit of each.  I think WEB took some of his rake off from the partnership profits out of the partnership right before or just as it was dissolved.  Then, he put most of that back into BRK and DRC within a few months.

[twacowfca]

Omagh, thanks for your clarification on private market values.  Current takeouts can often succeed at conservative offers.  The Apollo takeout of BRE appears to be heading for a takeout price of about forward BV, a steal for one of the better Lloyds insurers with significant reserve redundancies.

 

Re future inflation, I hope you are right. However, when the economy eventually gets out of the doldrums, I don't  see an alternative to serious inflation other than major tightening.  Checking the WSbase weekly has given us an edge in recent months in predicting turns in the market related to monetary tightening.

[rmitz]

No -- he pulled completely out of the market...well known fact by anyone who has spent the time to study Buffett.

 

If you want to call a massive position in Berkshire (et al) plus the investment of Berkshire's funds in fully-owned businesses, 100% cash, then so be it.  It is true that by 1969 he had moved Berkshire out of all its marketable securities positions (Berkshire 1969 annual letter), but those were being at least somewhat reinvested in other ventures.

 

[Christopher1]

No -- he pulled completely out of the market...well known fact by anyone who has spent the time to study Buffett.

 

If you want to call a massive position in Berkshire (et al) plus the investment of Berkshire's funds in fully-owned businesses, 100% cash, then so be it.  It is true that by 1969 he had moved Berkshire out of all its marketable securities positions (Berkshire 1969 annual letter), but those were being at least somewhat reinvested in other ventures.

 

 

Just a couple of info about Warren and his cash position in 1970:

 

- At the end of 1969 his net worth was about 26.5M.

- From the unwinding of the BPL he received about 16M cash and ABOUT 10m in shares (BRK, DRC and Blue cHIP sTAMP).

- Following the unwinding of the BPL, by the end of 1970, Warren reinvested his cash doubling his position in both BRK and DRC;

- Instead he brought his ownership in Blue Chip Stamp from 2% to 13%.

 

So I suppose that by the end of 1970 Warren with his personal portfolio was close to fully invested.

 

Best regards

[Smazz]

any of the 75%-100% guys dipping toes in yet?

[txlaw]

I was at 20% a month ago and am now down to 9%.  Hopefully, I will be able to contribute a bit more to my account in preparation for even lower markets.

[SharperDingaan]

 

Lets just say that while there are some attractive possibilities, Oct-Nov has something of an unhealthy reputation. Insurance is cheap, we dont forsee any sudden massive rally over the next 2-3 months, & we really question whether most companies will post Q3 earnings that were better than Q2.

 

Hopefully we're wrong, & we see evidence that the economy is improving - good news all around. If we're right, we'll at least be able to afford a couple of rounds of beer to cry into.

 

Seems a pretty good win-win.

 

SD

[Smazz]

 

Lets just say that while there are some attractive possibilities, Oct-Nov has something of an unhealthy reputation.

haha yes, its hard to shake that reputation....