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Poll: percentage of cash in your portfolio


shalab
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This is the S&P 500 P/E chart:

 

http://chart.apis.google.com/chart?cht=lxy&chs=750x384&chd=e:AAAQAgAvA.BPBfBuB-COCeCtC9DNDdDsD8EMEcErE7FLFbFqF6GKGaGpG5HJHZHpH4IIIYIoI3JHJXJnJ3KGKWKmK2LFLVLlL1MEMUMkM0NDNTNjNzOCOSOiOyPBPRPhPxQAQQQgQwQ.RPRfRvR.SOSeSuS-TOTdTtT9UNUcUsU8VMVbVrV7WLWaWqW6XKXZXpX5YJYYYoY4ZIZYZnZ3aHaXama2bGbWbmb1cFcVclc0dEdUdkdzeDeTejeyfCfSfifxgBgRghgwhAhQhghwh.iPifivi-jOjejuj-kNkdktk9lMlclsl8mLmbmrm7nKnanqn6oJoZopo5pJpYpop4qIqXqnq3rHrXrmr2sGsWsls1tFtVtkt0uEuUujuzvDvTvivywCwSwhwxxBxRxgxwyAyQygyvy.zPzfzuz-0O0e0u091N1d1t182M2c2s273L3b3r364K4a4q455J5Z5p546I6Y6o647H7X7n738G8W8m829G9V9l91-F-U-k-0.E.T.j.z..,XpXMUETgTjUaSeQsQzSWVXW2WaWUTqTjUOVnWCWhTwT.YWYlWmSXUJU2VJWdVOVTVzX3YpZbdWbmX5Wpa2dncmcqaAVqUTUiXoYlZxXTWCRZPPRFS5TfSoPzR.TTRpRqQ1OwO5NsNQOOQDPGOELhIgIKH0JBHrGgGjGqIDJuKbJaKVKuMaMwOhPMQ4UQYFa-iqmTcjblVZT3L6HeLLRmQrPCOuQ5V4YybrZJRSS6T-TjU-RHRyQTM7LtM.PEOJPCPUQeT.SkOrO-NVOQNHMTNwNfPPPFQCQOQqPCPXRtUeXnXaYJVZVmRpTJXBYbXeWPXpZybIV8YpZkbrdadyciezbXaJb5bib1bHX6V4RkVEVnWGWRX8UVRUNTLbN9OUPDOpNiL1MEL2LTLVLXL2K0JdIgLNM0MqLWMzOFPARbTGWKRyStTUVxV0WuT-XKZTZHaAaVbZZsZ4d7fsf0kQp8qDw9z84G4B2uvVpKmweBdTf0jZg4iBhoh3fmi0jEeuawTaVXaRZKcA,vEvE,WKWK&chco=0000FF&chxt=x,x,y,r&chxl=0:%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1890%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1900%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1910%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1920%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1930%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1940%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1950%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1960%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1970%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1980%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1990%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C2000%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C2010%7C1:%7C1881-01-01%7C2010-11-19&chxr=2,0,50%7C3,0,50&chxp=3,21.88092535&chxs=0,666666,12,0,lt,dddddd%7C2,666666,12,0,lt,dddddd%7C3,666666,12,0,lt,dddddd&chxtc=0,-384%7C2,-750&chm=o,FF0000,0,261,5,0%7Co,FF0000,0,97,5,0%7CtBlack%20Tuesday,666666,0,97,12,0%7Co,FF0000,0,213,5,0%7CtBlack%20Monday,666666,1,0,12,0

 

I will hold 50% cash until the P/E falls below the Grahamian Golden level of <10.

 

As Bruce Berkowitz says:

 

Cash is worth an awful lot of money when others don't have it.

 

Dry powder when the general market is overvalued and prepared to crash is the sweetest plum for a value investor.

 

The following illustrates what a SUSTAINABLE bull market is NOT based on:

 

http://granitegrok.com/pix2/chart-of-the-day-jobs-chart-october-2010.jpg

 

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This is the S&P 500 P/E chart:

 

http://chart.apis.google.com/chart?cht=lxy&chs=750x384&chd=e:AAAQAgAvA.BPBfBuB-COCeCtC9DNDdDsD8EMEcErE7FLFbFqF6GKGaGpG5HJHZHpH4IIIYIoI3JHJXJnJ3KGKWKmK2LFLVLlL1MEMUMkM0NDNTNjNzOCOSOiOyPBPRPhPxQAQQQgQwQ.RPRfRvR.SOSeSuS-TOTdTtT9UNUcUsU8VMVbVrV7WLWaWqW6XKXZXpX5YJYYYoY4ZIZYZnZ3aHaXama2bGbWbmb1cFcVclc0dEdUdkdzeDeTejeyfCfSfifxgBgRghgwhAhQhghwh.iPifivi-jOjejuj-kNkdktk9lMlclsl8mLmbmrm7nKnanqn6oJoZopo5pJpYpop4qIqXqnq3rHrXrmr2sGsWsls1tFtVtkt0uEuUujuzvDvTvivywCwSwhwxxBxRxgxwyAyQygyvy.zPzfzuz-0O0e0u091N1d1t182M2c2s273L3b3r364K4a4q455J5Z5p546I6Y6o647H7X7n738G8W8m829G9V9l91-F-U-k-0.E.T.j.z..,XpXMUETgTjUaSeQsQzSWVXW2WaWUTqTjUOVnWCWhTwT.YWYlWmSXUJU2VJWdVOVTVzX3YpZbdWbmX5Wpa2dncmcqaAVqUTUiXoYlZxXTWCRZPPRFS5TfSoPzR.TTRpRqQ1OwO5NsNQOOQDPGOELhIgIKH0JBHrGgGjGqIDJuKbJaKVKuMaMwOhPMQ4UQYFa-iqmTcjblVZT3L6HeLLRmQrPCOuQ5V4YybrZJRSS6T-TjU-RHRyQTM7LtM.PEOJPCPUQeT.SkOrO-NVOQNHMTNwNfPPPFQCQOQqPCPXRtUeXnXaYJVZVmRpTJXBYbXeWPXpZybIV8YpZkbrdadyciezbXaJb5bib1bHX6V4RkVEVnWGWRX8UVRUNTLbN9OUPDOpNiL1MEL2LTLVLXL2K0JdIgLNM0MqLWMzOFPARbTGWKRyStTUVxV0WuT-XKZTZHaAaVbZZsZ4d7fsf0kQp8qDw9z84G4B2uvVpKmweBdTf0jZg4iBhoh3fmi0jEeuawTaVXaRZKcA,vEvE,WKWK&chco=0000FF&chxt=x,x,y,r&chxl=0:%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1890%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1900%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1910%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1920%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1930%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1940%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1950%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1960%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1970%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1980%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C1990%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C2000%7C%7C%7C%7C%7C%7C%7C%7C%7C%7C2010%7C1:%7C1881-01-01%7C2010-11-19&chxr=2,0,50%7C3,0,50&chxp=3,21.88092535&chxs=0,666666,12,0,lt,dddddd%7C2,666666,12,0,lt,dddddd%7C3,666666,12,0,lt,dddddd&chxtc=0,-384%7C2,-750&chm=o,FF0000,0,261,5,0%7Co,FF0000,0,97,5,0%7CtBlack%20Tuesday,666666,0,97,12,0%7Co,FF0000,0,213,5,0%7CtBlack%20Monday,666666,1,0,12,0

 

I will hold 50% cash until the P/E falls below the Grahamian Golden level of <10.

 

As Bruce Berkowitz says:

 

Cash is worth an awful lot of money when others don't have it.

 

Dry powder when the general market is overvalued and prepared to crash is the sweetest plum for a value investor.

 

The following illustrates what a SUSTAINABLE bull market is NOT based on:

 

http://granitegrok.com/pix2/chart-of-the-day-jobs-chart-october-2010.jpg

 

 

BargainValue, PE is not a good metric unless it is compared with interest rates. The S&P Chart would probably tell you a different story if you used Bond/PE spreads.

 

BeerBaron

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beerbarron, you have one of those charts handy?

 

Additionally, what about the cash that is on the balance sheets of the equities that we hold? should that (at least in part) be accounted for in this poll?

 

My theory on the matter is this. If you have a company, which didn't do badly in the great re-pression, and they have net cash on their balance sheet that is over 1/3 of their market cap, that has to do something for your risk exposure. At that point, I would say you would be hard pressed to argue that the cash wouldn't be able to get deployed, as, in the recessions, they can put their cash to use (so long as they have managers that are willing to deploy it).

 

Additionally, historically, why would you hold 50% cash until the PE of the S&P falls to below 10. The only 2 times in history in which you would of been able to deploy for any length of time ultimately led to bubbles, which would have forced you to sell out way to early... Why not just find some cheap/reasonably priced quality companies and sit on them? If you need downside protection, why not just buy some out of the money puts on a company that seems to be crazily overvalued (because, it should get hammered anyway, regardless of if there is a huge correction)?

 

 

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I like cash as "downside protection" more than anything else.

 

I'm also content to wait for "fat pitches" since I don't have to swing for the 99% of "out of the strike zone" pitches that Mr. Market throws at me everyday. Many, many people thought that the valuations of February - March 2009 would never be seen again after 1974. Those who waited took advantage of those pitches and have, so far, done well.

 

Meanwhile, my other 50% of capital is always on the hunt for the next Fairfax, Berkshire or Markel.

 

I know that simple p/e ratios are not a silver bullet but as a very general overview of a market, it can help guide my research.

 

 

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This is your lucky day, I had something like this in my old files. It's not the spread as it's hard to correlate different date in Excel but it will give you an idea.

 

 

BeerBaron

 

* PE-5Y.bmp (2446.03 KB, 1310x637 - viewed 16 times.)

 

What if profit margins are on the way down and corporations profitability has reach a local peak?

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What if profit margins are on the way down and corporations profitability has reach a local peak?

 

Yes, you got it perfectly right. Comparing 5Y treasuries with current PE is a bit tricky. The PE is the current/lagging return and the Bond is your forward return. One is in the rearview mirror and the other is a clear view in front. A variant of this chart could be to take the next 5 Years of PE and average it. If anybody wants to play around with the data here is the spreadsheet.

 

BeerBaron

 

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Another thing to consider when looking at PE ratios in a historical context is the level of tax rates. Consider the following (when I say pre-tax, I mean pre dividend & capital gains taxes):

 

In 1974 - the top marginal tax rate was 60%, dividends were taxed at the marginal rate, and capital gains were taxed at 36.5%. Based on the PE chart in a prior post, the PE ratio was roughly 9X in 1974 for a pre-dividend/capital gains tax yield of 11.11%. Assuming the market payout ratio was 50%, the after-tax yield drops to 5.75%, and the after-tax PE is 17.39X.

 

Currently - the top marginal tax rate is 35%, and dividends/capital gains are taxed at 15%. Again, assuming a 50% payout ratio, the after-tax yield is 3.88% and the after-tax PE is 25.74X.

 

So - the current market pre-tax PE of 21.88X divided by the 1974 pre-tax PE of 9X is 243%; however, the current after-tax PE of 25.74X divided by the 1974 after-tax PE of 17.39X is 148% - a huge discrepancy due to the difference in tax rates.

 

The 1974-equivalent PE ratio based on today's tax rates can be calculated as follows: 1974 pre-tax earnings yield was 11.11% (100/PE of 9) and the after-tax earnings yield was 5.75% - let's call 5.75/11.11 the after-tax yield margin, which was 52% in 1974; currently the pre-tax earnings yield is 4.57% (100/PE of 21.88) and the after-tax earnings yield is 3.88% for an after-tax yield margin of 85%.

 

If we divide the 1974 after-tax earnings yield of 5.75% by today's after-tax yield margin of 85%, we arrive at a 1974-equivalent pre-tax earnings yield of 6.76%. By dividing 100 by 6.76, we arrive at a 1974-equivalent PE ratio of 14.78X.

 

It would take a 32% drop in the market to reach this "1974-equivalent" PE ratio and 54% drop to reach the "Golden Level" of 10X.

 

In order to evaluate the fair value of the market, one must look at interest rate levels. The BAA yield averaged 9.58% in 1974 for an after-tax yield of 3.83% (based on a 60% marginal tax rate), and the current BAA yield sits at 6% pre-tax or 3.90% after-tax (based on a 35% marginal tax rate).

 

For the sake of argument, let's assume the after-tax BAA yield is an appropriate rate to use to capitalize after-tax market earnings. In 1974 the after-tax earnings yield was 5.75% versus the after-tax BAA yield of 3.83% - assuming the market should yield the after-tax BAA yield, then one could say the 1974 market was undervalued. Today's market yields 3.88% after-tax versus an after-tax BAA yield of 3.90% - hence, one could say today's market is roughly fairly valued.

 

I say all this merely to point out that tax rates make a HUGE difference when comparing PE ratios across time periods and that investors waiting for 10X PE ratios may be waiting for a long while. I hope I am wrong though because a 10X PE market would be a dream.

 

(Excel sheet with calculations attached)

 

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BVH,  This is a repeating theme on this board.  Every few months someone argues that they are going to wait until the market retrenches to some insanely low level before they invest.  The last time we went through this was in August.  The board member who was persistent that he/she was going to wait for markets to inevitably retrench missed out on an 11% overall rally from then until now.

 

The problem with the "I am not going to invest until something specific event" is that people miss out entirely.  Go into the boards archives, back to February/March 2008 and see what people were saying and doing.  There were those then who decided they were going to wait until markets really got low while a few of us were buying hand over fist.  

 

The second part of your thesis of choosing good, cheaply valued companies, makes more sense.  In that realm you can easily find companies trading in your sub 10 PE or < 1 BV realm.  In fact I have an entire portfolio stuffed with such gems right now.

 

To counteract your Berkowitz quote I offer you one Walter Schloss who stayed in the market for over 40 years, often with more than 100 stocks at a time, and still achieved relatively consistent results of 21% annually to the general partner.

 

   

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there is nothing wrong with zero or less cash but you have to make sure the cost of financing is reasonable and you have a back-up plan so you won't get sold out of your best investment at the worst possible time. 50% down years (for the S&P) are rare - back to back 50% down years are even more rare. There is an argument for not worrying about another 50% drop so soon after a recent one and thus an argument for larger than usual leverage to ride the next bubble.

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With the best healthcare companies in the world, the whole US defense industry, a number of dominant retailers, the dominant players in the tech industry outside of AAPL, all at current FCF yields of 8-12%, along with some of the strongest and most well run insurance companies in the world around book value or less, all with strong balance sheets, many of these companies repurchasing shares or boosting dividends.... I have a hard time thinking the market is in a dangerously overvalued state here. Sure, some stocks and some areas are hot, but there are loads of out of favor companies.

 

I dont mean to say we're at 1974 levels here by any stretch, but the companies we're studying seem to offer enough opportunity to make me somewhat skeptical of the idea that we should be running for the hills. Not a market call, just want to present the other side of the debate. By all means, keep some dry powder around, but market timing based on top down measures is hard (in my opinion).

 

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BVH,  This is a repeating theme on this board.  Every few months someone argues that they are going to wait until the market retrenches to some insanely low level before they invest.  The last time we went through this was in August.  The board member who was persistent that he/she was going to wait for markets to inevitably retrench missed out on an 11% overall rally from then until now.

 

The problem with the "I am not going to invest until something specific event" is that people miss out entirely.  Go into the boards archives, back to February/March 2008 and see what people were saying and doing.  There were those then who decided they were going to wait until markets really got low while a few of us were buying hand over fist.  

 

The second part of your thesis of choosing good, cheaply valued companies, makes more sense.  In that realm you can easily find companies trading in your sub 10 PE or < 1 BV realm.  In fact I have an entire portfolio stuffed with such gems right now.

 

To counteract your Berkowitz quote I offer you one Walter Schloss who stayed in the market for over 40 years, often with more than 100 stocks at a time, and still achieved relatively consistent results of 21% annually to the general partner.

 

If an investing philosophy works for me then I don't understand why that would be a problem for someone else.

 

It's my money, right?

 

Conversely, if another person has a certain strategy for wealth creation that works for them I have no business interfering with that person's decisions.

 

Some wish to be fully invested in equities at all times. Personally, I don't feel comfortable risking that with my cash.

 

I have no qualms about "missing rallies". I am mostly trying to miss crashes. The upside will take care of itself by investing SOME of my capital with solid, well-run companies.

 

Cheers!  :)

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BVH,  This is a repeating theme on this board.  Every few months someone argues that they are going to wait until the market retrenches to some insanely low level before they invest.  The last time we went through this was in August.  The board member who was persistent that he/she was going to wait for markets to inevitably retrench missed out on an 11% overall rally from then until now.

 

The problem with the "I am not going to invest until something specific event" is that people miss out entirely.  Go into the boards archives, back to February/March 2008 and see what people were saying and doing.  There were those then who decided they were going to wait until markets really got low while a few of us were buying hand over fist.  

 

The second part of your thesis of choosing good, cheaply valued companies, makes more sense.  In that realm you can easily find companies trading in your sub 10 PE or < 1 BV realm.  In fact I have an entire portfolio stuffed with such gems right now.

 

To counteract your Berkowitz quote I offer you one Walter Schloss who stayed in the market for over 40 years, often with more than 100 stocks at a time, and still achieved relatively consistent results of 21% annually to the general partner.

 

If an investing philosophy works for me then I don't understand why that would be a problem for someone else.

 

It's my money, right?

 

Conversely, if another person has a certain strategy for wealth creation that works for them I have no business interfering with that person's decisions.

 

Some wish to be fully invested in equities at all times. Personally, I don't feel comfortable risking that with my cash.

 

I have no qualms about "missing rallies". I am mostly trying to miss crashes. The upside will take care of itself by investing SOME of my capital with solid, well-run companies.

 

Cheers!  :)

 

I don't think that anyone here has a problem with what you are doing or is trying to interfere, but rather, put out some stuff for discussion. Obviously, the dissenters here (myself included) don't feel comfortable sitting on too much cash, but, we may also have jobs or other assets that we can raise cash rather quickly with, if need be. Truly, it is whatever works for you!

 

Certainly, my investment style isn't for everyone, and, it won't even be for me in 50 years! When I am old a feeble, I will sit on a hell of a lot more cash than I do now. I will also probably move into things that pay me while I wait for them to go up in price (presently, I collect no dividends or interest, other than on my savings and money market accounts).

 

Regardless, it does anyone good to occasionally go into the archives and look at what people were doing in March 08. My biggest mistake in that period was not buying 2 20+ baggers!

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BVH,  This is a repeating theme on this board.  Every few months someone argues that they are going to wait until the market retrenches to some insanely low level before they invest.  The last time we went through this was in August.  The board member who was persistent that he/she was going to wait for markets to inevitably retrench missed out on an 11% overall rally from then until now.

 

The problem with the "I am not going to invest until something specific event" is that people miss out entirely.  Go into the boards archives, back to February/March 2008 and see what people were saying and doing.  There were those then who decided they were going to wait until markets really got low while a few of us were buying hand over fist.  

 

The second part of your thesis of choosing good, cheaply valued companies, makes more sense.  In that realm you can easily find companies trading in your sub 10 PE or < 1 BV realm.  In fact I have an entire portfolio stuffed with such gems right now.

 

To counteract your Berkowitz quote I offer you one Walter Schloss who stayed in the market for over 40 years, often with more than 100 stocks at a time, and still achieved relatively consistent results of 21% annually to the general partner.

 

If an investing philosophy works for me then I don't understand why that would be a problem for someone else.

 

It's my money, right?

 

Conversely, if another person has a certain strategy for wealth creation that works for them I have no business interfering with that person's decisions.

 

Some wish to be fully invested in equities at all times. Personally, I don't feel comfortable risking that with my cash.

 

I have no qualms about "missing rallies". I am mostly trying to miss crashes. The upside will take care of itself by investing SOME of my capital with solid, well-run companies.

 

Cheers!  :)

Thats fair.  Since Summer 2008 I have had more ideas then cash.

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