The 50% cash guy - Sanjeev

[twacowfca]

obviously market timing, but it may be justified considering what we're seeing in europe.

 

What's wrong with intelligent market timing?  Obviously, selling a large position in a great business that isn't overvalued is apt to be penny wise and pound foolish for some short term protection.  But Warren himself said It was a mistake to hold even great, mature businesses at 50 times earnings in the late 90's when he had seen the writing on the wall.  What's wrong with going "all in" in March, 2009 when great businesses were selling at 20% to 30% normalized earnings yields?

 

And what's wrong now with having cash available during a season that historically has poor returns  to pick up bargains if things in Europe get ugly?

[alertmeipp]

obviously market timing, but it may be justified considering what we're seeing in europe.

 

What's wrong with intelligent market timing?  Obviously, selling a large position in a great business that isn't overvalued is apt to be penny wise and pound foolish for some short term protection.  But Warren himself said It was a mistake to hold even great, mature businesses at 50 times earnings in the late 90's when he had seen the writing on the wall.  What's wrong with going "all in" in March, 2009 when great businesses were selling at 20% to 30% normalized earnings yields?

 

And what's wrong now with having cash available during a season that historically has poor returns  to pick up bargains if things in Europe get ugly?

 

Nothing wrong with it. Whatever works for you. Of coz, everyone wants to buy cheaper, but one may also miss the boat when things rally back.

[Parsad]

Thanks for the tips Moore...I will reexamine my allocation!  ;D  At the same time, do you think you might be less objective because my sentiment is a bit different than last year, whereas yours has remained the same?

 

We try and stay away from forming any sort of permanent bias, other than we buy cheap and sell dear.  When were we buying last year?  Take a look at the chart below:

 

http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

 

When were we selling and I was warning about being defensive?  Take a look at the same chart.  Not hard to do the math! 

 

We aren't timing the market...we are quantifying risk and reward.  We thought the world could handle Greece last year, that's why we were buying.  But as the year has progressed, we think that the world would have a difficult time with Spain.  We're not saying sell everything.  We're saying that things could get cheaper again based on both fundamentals and difficulties deleveraging Europe.

 

I haven't sold a single share of BAC or WFC.  I haven't sold a single warrant in BAC.  We still own them and we aren't selling because we think those banks are cheap and we like management.  But we did sell other things that aren't as cheap and we did build up cash because things were getting more expensive.  We do everything we can to protect the portfolio and cash gives us tremendous flexibility when valuations aren't quite to our liking. 

 

We're not holding cash for the long-term...only until we find more things that give us an adequate risk premium...and we think that premium will arrive via difficulties in Europe.  We'll let everyone else overpay.  Cheers! 

 

 

[Parsad]

By the way, I would recommend that you guys take a look at slide 35 from Fairfax's AGM presentation.

 

http://www.fairfax.ca/Theme/Fairfax/files/2012%20AGM%20Slide%20Presentation_v001_f4dd72.pdf

 

That's kind of related to the stuff we had been watching leading up to our decision to become cautious again.  That unemployment rate in Europe is not at a bottom and Europe's economy overall is contracting.  Not like 2009, but it is contracting.

 

http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tsieb020

 

And unfortunately, the structure of the EU and the debt to GDP ratios of many sovereign nations, would make it difficult for them to stimulate their way out of this without any resulting dislocation.  The U.S. is not in the same situation...they have more levers they can still pull, and they can inflate their way out of this as unsavory as that may seem.  But any significant economic upheaval in Europe is going to affect everyone else to some degree.  Cheers!   

[meiroy]

 

How is what Parsad doing any different than anticipating a turn in a cyclical industry?  If one is under the impression that the process has began it would only be wise to take advantage of it (above posts have not even mentioned the coming hard landing in China).

 

P.S the bank warrants are timing the market.

[Charlie]

Buffett talked after the Berkshire Hathaway annual meeting at CNBC about holding cash:  ;)

 

BECKY: Warren, we've been watching oil prices this morning, too. And as we've seen, the risk off trade with stocks under a lot of pressure this morning. You've got Treasuries here in the United States a bit higher. Oil prices have been coming down. And this started happening on Friday after we got that lousy jobs number. Right now you can see it's trading at 97 and change, just below $98. You've got a big stake in Conoco. How do you see oil prices going from here and how does it play into your investments?

BUFFETT: Well, I— the truth is I don't have the faintest idea, which is probably why I shouldn't have phoned Conoco in the first place. We did not make money with Conoco. And this is— you talk about risk off...

BECKY: Yeah.

BUFFETT: ...if my understanding— if they take— risk off is selling and going into cash...

BECKY: Yeah.

BUFFETT: ...that's risk on for me.

BECKY: Yeah.

BUFFETT: I think— I think cash is probably as risky an asset as you can own over time. So you're not taking risk off when you— when you go into cash. You are going into something that is sure to decline in purchasing power over time. So that is the biggest risk on trade I know is to own cash.

[bmichaud]

Sanjeev/twa time horizon for holding cash = ~1 year

 

WEB/CM = 100 years

 

 

You can't compare the two. Makes no sense.

 

 

 

[Valuebo]

Yeah sure, WEB is talking about 100 years. The effects of holding cash for 2-5 years are more than high enough, especially for someone like WEB who was able to compound money at 25%/year. The fact that WEB has been buying aggressively since mid last year says enough imo. He's not planning to sit on crazy amounts of money for 2-5 years because things 'might' get uglier.

 

While I think it takes discipline to go to 50% cash and changing your believes over time, comparing the 50-times earnings mania with the market today makes no sense at all to me Parsad. There are a reasonable amount of opportunities around that - as businesses - will do just fine in almost any market. For some, like you, it will make sense to have a big cash position in this market. For others, like me, it will make no sense at all. It's all personal and both actions can be correct imo. I'm sure you agree on this?  :)

[twacowfca]

Sanjeev/twa time horizon for holding cash = ~1 year

 

WEB/CM = 100 years

 

 

You can't compare the two. Makes no sense.

 

Actually, we hold very little cash and are about 150% long with non recourse leverage similar to very long dated leaps or total return leaps.  This is balanced with the other end of a barbell that is potentially low downside volatility or negatively correlated with the market.  We own FFH which has hedges.  A big part of this is BRK and leaps on BRK.  These have potential downside protection through the likely aggressive buyback if the price goes down.  BRK could also be a source of cash if the market throws up some amazing bargains.

 

Last month we bought some out of the money index puts including some that were way out of the money a la Nassim Taleb when volatility was low.  These have recently increased in price as the market has declined.  The other potential source of cash in a market decline is our largest, long term holding that typically pays large end of the year special dividends in years when they don't have large cat losses.

[bmichaud]

Interesting - out of curiosity, do you calculate the effect of those puts in your net long calc? Do they hedge a material portion of NAV?

[twacowfca]

Interesting - out of curiosity, do you calculate the effect of those puts in your net long calc? Do they hedge a material portion of NAV?

 

No, the puts are out of that calculation, although they do reduce the net long position significantly while they last.  They are  dated through August as a hedge in the event that the uncertainty in Europe or other events could affect the market in the US.

[Parsad]

Yeah sure, WEB is talking about 100 years. The effects of holding cash for 2-5 years are more than high enough, especially for someone like WEB who was able to compound money at 25%/year. The fact that WEB has been buying aggressively since mid last year says enough imo. He's not planning to sit on crazy amounts of money for 2-5 years because things 'might' get uglier.

 

While I think it takes discipline to go to 50% cash and changing your believes over time, comparing the 50-times earnings mania with the market today makes no sense at all to me Parsad. There are a reasonable amount of opportunities around that - as businesses - will do just fine in almost any market. For some, like you, it will make sense to have a big cash position in this market. For others, like me, it will make no sense at all. It's all personal and both actions can be correct imo. I'm sure you agree on this?  :)

 

Yes Tom, I do agree.  Especially if one pool of capital is permanent personal capital, and the other (in our case) is non-permanent, redeemable capital.  You are willing to withstand a considerable amount of volatility, whereas I cannot guarantee that the constitution of our partners is as high on a collective basis.  Thus I have to view the world through best case scenario and worst case scenario on a daily basis, and weigh that against the risk premium provided to us on investment opportunities.  Cheers!

[twacowfca]

Yeah sure, WEB is talking about 100 years. The effects of holding cash for 2-5 years are more than high enough, especially for someone like WEB who was able to compound money at 25%/year. The fact that WEB has been buying aggressively since mid last year says enough imo. He's not planning to sit on crazy amounts of money for 2-5 years because things 'might' get uglier.

 

While I think it takes discipline to go to 50% cash and changing your believes over time, comparing the 50-times earnings mania with the market today makes no sense at all to me Parsad. There are a reasonable amount of opportunities around that - as businesses - will do just fine in almost any market. For some, like you, it will make sense to have a big cash position in this market. For others, like me, it will make no sense at all. It's all personal and both actions can be correct imo. I'm sure you agree on this?  :)

 

Yes Tom, I do agree.  Especially if one pool of capital is permanent personal capital, and the other (in our case) is non-permanent, redeemable capital.  You are willing to withstand a considerable amount of volatility, whereas I cannot guarantee that the constitution of our partners is as high on a collective basis.  Thus I have to view the world through best case scenario and worst case scenario on a daily basis, and weigh that against the risk premium provided to us on investment opportunities.  Cheers!

 

Sanjeev,

 

I think what you are doing as a manager of funds that don't have a lockup is wise.  It reminds me of what Frank Martin of Martin Capital management has done very successfully to manage capital through the cycle and produce superior returns for his clients.

 

My hat is off to you, and that opinion will not change regardless of the direction of the market in the next few months.  :)

[Parsad]

Yeah sure, WEB is talking about 100 years. The effects of holding cash for 2-5 years are more than high enough, especially for someone like WEB who was able to compound money at 25%/year. The fact that WEB has been buying aggressively since mid last year says enough imo. He's not planning to sit on crazy amounts of money for 2-5 years because things 'might' get uglier.

 

While I think it takes discipline to go to 50% cash and changing your believes over time, comparing the 50-times earnings mania with the market today makes no sense at all to me Parsad. There are a reasonable amount of opportunities around that - as businesses - will do just fine in almost any market. For some, like you, it will make sense to have a big cash position in this market. For others, like me, it will make no sense at all. It's all personal and both actions can be correct imo. I'm sure you agree on this?  :)

 

Yes Tom, I do agree.  Especially if one pool of capital is permanent personal capital, and the other (in our case) is non-permanent, redeemable capital.  You are willing to withstand a considerable amount of volatility, whereas I cannot guarantee that the constitution of our partners is as high on a collective basis.  Thus I have to view the world through best case scenario and worst case scenario on a daily basis, and weigh that against the risk premium provided to us on investment opportunities.  Cheers!

 

Sanjeev,

 

I think what you are doing as a manager of funds that don't have a lockup is wise.  It reminds me of what Frank Martin of Martin Capital management has done very successfully to manage capital through the cycle and produce superior returns for his clients.

 

My hat is off to you, and that opinion will not change regardless of the direction of the market in the next few months.  :)

 

Thanks Twa!  Incidentally, we're pleased that both of our funds have now pulled ahead of their respective indices.  It took a while to make amends with the Canadian Fund, but we are now well ahead of both comparative indices (S&P500 Cdn & TSX60).  Our goal has always been, and always will be to provide above average returns with no permanent loss of capital, while giving our partners access to their money.  We can sleep well at night, along with our partners, and I can't say that about many managers.  Cheers!