How much are you allocated in cash?

[Mephistopheles]

With the Dow at 14,000, I am curious to know how much cash people here have in their portfolios. I have roughly 30%, but can't figure out whether to gather more or try to find new ideas.

[moore_capital54]

We have the highest allocation of cash since the late 1990s at 60%. As of today our market exposure is about 5% net long and we may soon be 5-10% net short.

 

Remember, an improvement in economic conditions guarantees higher rates, which is something nobody is factoring in at the moment. Higher rates in risk-free assets will in turn lead to a re-balancing of risk and with that more attractive risk-free investment opportunities for those with cash.

 

We waited a long time for this and as many of you know we were nearly 100% long going into this rally and had one of our best years in 2012 (which allowed me to take the final 4 months off and travel with my family).

 

We have sold 70% of our BAC position, all of our RIMM/SODA etc and all the other volatile names. Believe it or not I actually like FFH CN here for the first time in a while.

 

As always I am bullish on the Canadian tsx v resource names which got hammered. In my view their valuations can rise even in a declining gold price environment which may be the case should rates rise.

 

The number one thing investors should now be focusing on is whether their portfolio is positioned for a rising interest rate environment. It may be 1-2 years away but now is the time to make those bets and re-balance your risk. Note I am not making any single name predictions because I can't seem to find deep value ideas (other than FFH CN which seems to be a no brainer for an easy 25-50% in 2 years or less).  The reason I believe I cannot find interesting deep value ideas is that this move in the markets was very correlated with the exception of small caps some of which may still offer some good upside.

 

Make no mistake about it, rising interests will put pressure on margins reversing any trend in multiple expansion we have been seeing.

 

On the central banking side I believe we are witnessing a classic liquidity bubble scenario and that real inflation is rising at exactly the same pace of nominal growth. Effectively, we are making no progress other than the fact that we are using more jelly beans to transact providing a false wealth effect. Equities were in fact depressed and investors like the ones on this board took advantage of that and increased our real net worths.

 

That is my rant. I know some of you have PM'd me. Unfortunately I can no longer post from my office as I have implemented new compliance procedures after all the BS that has plagued the HF community. I will continue to post from home sporadically. I do lurk and read the board but just can't post as much as I used to.

 

Cheers!

[LC]

20%

[Parsad]

Good to hear from you Moore!  That explains the infrequent posts now.  No worries!

 

We are also building up cash...40% plus now...and we continue to whittle down investments that have gone up considerably.  We had sold about a third of our BAC warrants.  We still have all the equity and most of the warrants...higher interest rates will actually be beneficial to banks long-term, even though short-term stock volatility may arise.  We are in BAC and WFC for the long-term.  I expect the annual dividend at BAC to be about 20% of our equity cost within three years.

 

Surprisingly, I remain little concerned with the United States, but continue to worry about Europe and Asia...I don't think the numbers are real.  We aren't finding any real bargains right now, and are digging around in the very small-cap and micro-cap area.  Cheers! 

[jay21]

My thoughts are similar to Moore's on a macro level, but that doesn't affect my investing.  I am worrying about a shock in rates when people lose faith in Central Banks as opposed to steadily rising rates, which would probably result from improving economies which may cause a neutral effect on multiples.  I like well managed insurance companies in this environment who keep a short duration book.  Shocks in rates can cause a hardening of insurance rates as capital is taken out of the system. Insurance companies with short duration portfolios will be the ones to take advantage of better interest rates and insurance rates.

 

Also still think there's opportunities in banking, housing, autos, huge moated companies with reliable cash flows/dividends and jockey stocks. 

[Guest]

moore, glad to see you back.  :)

 

From nearly 0% to about 8% now

[racemize]

I'm still at 0%, but I'm not buying anything either.  I'm planning on just holding what I have (maybe selling one small position) and building cash from my full-time job.

[plato1976]

Parsad,

 

Do you think the long term impact of high rate is positive for AIG ?

On the one hand I feel it's positive for their P&C, but on the other hand I feel they may have long duration bonds in their life insurance business... so I am not sure. Their average duration of bond seems not high - 5/6 years as I remember

 

Thanks!

/plato1976

 

Good to hear from you Moore!  That explains the infrequent posts now.  No worries!

 

We are also building up cash...40% plus now...and we continue to whittle down investments that have gone up considerably.  We had sold about a third of our BAC warrants.  We still have all the equity and most of the warrants...higher interest rates will actually be beneficial to banks long-term, even though short-term stock volatility may arise.  We are in BAC and WFC for the long-term.  I expect the annual dividend at BAC to be about 20% of our equity cost within three years.

 

Surprisingly, I remain little concerned with the United States, but continue to worry about Europe and Asia...I don't think the numbers are real.  We aren't finding any real bargains right now, and are digging around in the very small-cap and micro-cap area.  Cheers!

[LowIQinvestor]

8% cash

 

Although Fairfax feels like cash over the past 2 years :(

 

http://finance.yahoo.com/echarts?s=FFH.TO+Interactive#symbol=ffh.to;range=2y;compare=^gspc;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

[ERICOPOLY]

Parsad,

 

Do you think the long term impact of high rate is positive for AIG ?

 

 

It would make it easier to earn 10% ROE if the E goes down.

[plato1976]

40% cash here

and if you think ffh is cash then 50%+

 

8% cash

 

Although Fairfax feels like cash over the past 2 years :(

 

http://finance.yahoo.com/echarts?s=FFH.TO+Interactive#symbol=ffh.to;range=2y;compare=^gspc;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

[PlanMaestro]

 

Remember, an improvement in economic conditions guarantees higher rates, which is something nobody is factoring in at the moment.

 

Some are factoring it and they are ways around it … if it happens.

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/zions-bancorp/msg102061/#msg102061

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/zions-bancorp/msg101681/#msg101681

[mevsemt]

40ish % cash, and thinking of trimming my holdings even further.  http://mevsemt.blogspot.com/2013/01/2012-returns.html

[hyten1]

wow hmmm

 

i am only at 15% cash from 5% a month ago

 

[Parsad]

Parsad,

 

Do you think the long term impact of high rate is positive for AIG ?

On the one hand I feel it's positive for their P&C, but on the other hand I feel they may have long duration bonds in their life insurance business... so I am not sure. Their average duration of bond seems not high - 5/6 years as I remember

 

Thanks!

/plato1976

 

Good to hear from you Moore!  That explains the infrequent posts now.  No worries!

 

We are also building up cash...40% plus now...and we continue to whittle down investments that have gone up considerably.  We had sold about a third of our BAC warrants.  We still have all the equity and most of the warrants...higher interest rates will actually be beneficial to banks long-term, even though short-term stock volatility may arise.  We are in BAC and WFC for the long-term.  I expect the annual dividend at BAC to be about 20% of our equity cost within three years.

 

Surprisingly, I remain little concerned with the United States, but continue to worry about Europe and Asia...I don't think the numbers are real.  We aren't finding any real bargains right now, and are digging around in the very small-cap and micro-cap area.  Cheers!

 

With all financials, there is some risk as rates rise, because longer term liabilities are usually offset with longer term assets.  As rates rise, the value of the longer term, low-rate asset decreases while the liability remains the same...thus Eric's comment about the equity decreasing and a higher ROE.  At some point, rates stabilize and the new business at higher rates will be positive for the financial institution...banks, insurance, etc. 

 

I don't know enough about AIG's entire book to tell you what would happen, but from everything I've seen of Benmosche, he seems to be relatively risk averse and is a shrewd operator.  But if you have very high interest rates or elevated rates over a period of time like the 80's, it can be quite detrimental for insurers.  That also happens the other way too as rates drop and yields drop.  AIG survived that so I suspect they won't have much difficulty surviving rates moving the other way.  Cheers! 

[moore_capital54]

We actually like brokerage firms more than banks in a rising interest rate environment. A company like E*Trade or Ameritrade will earn much more than they do today. I think that when it comes to commercial banks its not as simple as assuming that with higher rates their spread will increase. I believe that it will be more difficult for a commercial bank to retain record profitability with its cost of capital up materially. Compare that to E*Trade which will all of a sudden have about $30B in deposits it can earn 1-2% on..

[locatevalue]

0% cash 35% in special situation closing in March..I consider this as cash and move it to cash if gap closes or find a deep value

[watsa_is_a_randian_hero]

We actually like brokerage firms more than banks in a rising interest rate environment. A company like E*Trade or Ameritrade will earn much more than they do today. I think that when it comes to commercial banks its not as simple as assuming that with higher rates their spread will increase. I believe that it will be more difficult for a commercial bank to retain record profitability with its cost of capital up materially. Compare that to E*Trade which will all of a sudden have about $30B in deposits it can earn 1-2% on..

 

so will payroll companies...ADP has huge float with most invested in short-term fixed income.

[CONeal]

0% cash 20% in a situation that will be complete before May 1st.  Plan on moving that to cash and suck my thumb until prices come to inline with the watch list.

[ubuy2wron]

As of today I am at 30 percent cash and I have a 30% hedge as well. I put the hedge on this week. I have been lightening up on everything  pretty much the only thing, I have been buying is TEVA, ECA FFH and VLN..

[ubuy2wron]

Moore glad that you are back tho I guess you never really went away. I promised myself that I would buy some gold if MR Bernanke did a QE3 which he did and so I guess my cash is really at 35% as I have a 5% gold position which I really look as an alternative currency or cash. Its scary how we think alike at this site even tho we bicker over the wisdom of positions like cats and dogs. LOL

[jeffmori7]

Wow..you guys are disciplined! I'm at 0% cash, as usual, still buying some BAC and AIG...

 

I have still a little portfolio in 5 digit, I am building it with more cash each year, so it seems to me that I can't never buy enough of what I like...I have to learn patience.

[siddharth18]

Isn't one of the salient points of Buffett's teachings that one should make investment decisions only on micro factors and NOT on macro factors?

 

"I make no attempt to forecast the general market - my efforts are devoted to finding undervalued securities.

 

-Warren Buffett, February 11, 1959

 

I suppose you could say that securities that fall into your circle of competence are overvalued and you are simply waiting for their prices to fall back to earth.

[Cardboard]

Really surprised Moore that you went to 60% cash based on a macro call: interest rates direction and their effect. As you probably know, 1994 showed some pretty steep declines in bonds and long term treasuries while the S&P still went up 1.3%.

 

I find it also surprising since just over a year ago you kind of implied that anyone moving heavily to cash in his or her portfolio was most likely an amateur managing a few thousand dollars. You sounded very convinced that one should always stay invested if opportunities are found despite macro. Is BAC not a deal under $12 and under tangible book, not even book? If you still like precious metals, there must be tons of bargains in that field. No?

 

Cardboard

[ERICOPOLY]

I'm guessing he needs a heavy cash allocation to heat his 8,000 sqft Hoggs Hollow mansion.