How much are you allocated in cash?

[giofranchi]

I think it is very unlikely that the secular bottom was reached in 2009, with a CAPE twice as high as the one reached in 1982.

 

Probably matters to investors what the "real" earnings yield is.  1982 inflation (actual and expected) was very different from 2009 inflation & expectations. 

 

Investors should naturally ask for a higher earnings yield in order to earn a return in excess of the rate of inflation.  No?

 

How about comparing the real earnings yield of the market in 2009 vs 1982?

 

 

That's a good point.  Ron Muhlenkamp his book has a good chapter showing that market returns have a high correlation with the real earnings yield which was much lower than the nominal earnings yield in the 1970's through early 1980's.

 

Well,

what about 1949? The secular bear ended with a Shiller P/E of 9 and long-term interest rates that were as low as they are today.

I would keep it easy: not only we are in a secular bear for stocks, but we also find ourselves at the end of a 70 years old debt super-cycle. High general stock market prices + High level of debt that must come down = High probability that something might go wrong.

That doesn’t mean something WILL go wrong, but it is enough for me to prefer to be cautious, rather than aggressive, in my investing right now.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[giofranchi]

I think it is very unlikely that the secular bottom was reached in 2009, with a CAPE twice as high as the one reached in 1982.

 

Probably matters to investors what the "real" earnings yield is.  1982 inflation (actual and expected) was very different from 2009 inflation & expectations. 

 

Investors should naturally ask for a higher earnings yield in order to earn a return in excess of the rate of inflation.  No?

 

How about comparing the real earnings yield of the market in 2009 vs 1982?

 

 

That's a good point.  Ron Muhlenkamp his book has a good chapter showing that market returns have a high correlation with the real earnings yield which was much lower than the nominal earnings yield in the 1970's through early 1980's.

 

Well,

what about 1949? The secular bear ended with a Shiller P/E of 9 and long-term interest rates that were as low as they are today.

I would keep it easy: not only we are in a secular bear for stocks, but we also find ourselves at the end of a 70 years old debt super-cycle. High general stock market prices + High level of debt that must come down = High probability that something might go wrong.

That doesn’t mean something WILL go wrong, but it is enough for me to prefer to be cautious, rather than aggressive, in my investing right now.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

I would keep it easier still: when Mr. Watsa says

And so right now, it's very important not to reach for yield because if you do reach for yield, if you put money into the stock market at these prices, you could suffer permanent losses. We'll take temporary losses, but we don't like taking permanent losses.

Prem Watsa, FFH Conference Call Q3 2012

 

It is enough for me to prefer to be cautious, rather than aggressive, in my investing right now.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[twacowfca]

I think it is very unlikely that the secular bottom was reached in 2009, with a CAPE twice as high as the one reached in 1982.

 

Probably matters to investors what the "real" earnings yield is.  1982 inflation (actual and expected) was very different from 2009 inflation & expectations. 

 

Investors should naturally ask for a higher earnings yield in order to earn a return in excess of the rate of inflation.  No?

 

How about comparing the real earnings yield of the market in 2009 vs 1982?

 

 

That's a good point.  Ron Muhlenkamp his book has a good chapter showing that market returns have a high correlation with the real earnings yield which was much lower than the nominal earnings yield in the 1970's through early 1980's.

 

Well,

what about 1949? The secular bear ended with a Shiller P/E of 9 and long-term interest rates that were as low as they are today.

I would keep it easy: not only we are in a secular bear for stocks, but we also find ourselves at the end of a 70 years old debt super-cycle. High general stock market prices + High level of debt that must come down = High probability that something might go wrong.

That doesn’t mean something WILL go wrong, but it is enough for me to prefer to be cautious, rather than aggressive, in my investing right now.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

The post 1929 crash US bear market low in 1949 came after one of the most inflationary periods in US history.  The CPI rose from 14.000 in 1941 to 24.500 in late 1948 as the back of post war inflation was finally broken as it was in the 1970's through early 1980's inflation under Volker.

[nwoodman]

0% cash

FFH	32%
BRK	26%
L	14%
BAC	5%
LRE	4%
BKIR	4%
GAP.AX	4%
DELL	4%

 

<4% UNAM, MKL, RIMM, PARRO.PA

 

Thanks to all for such a great forum.  New cash going to FFH due to P/B and inherent hedge, however all the companies I am interested in look undervalued when investing AUD. 

[giofranchi]

I think it is very unlikely that the secular bottom was reached in 2009, with a CAPE twice as high as the one reached in 1982.

 

Probably matters to investors what the "real" earnings yield is.  1982 inflation (actual and expected) was very different from 2009 inflation & expectations. 

 

Investors should naturally ask for a higher earnings yield in order to earn a return in excess of the rate of inflation.  No?

 

How about comparing the real earnings yield of the market in 2009 vs 1982?

 

 

That's a good point.  Ron Muhlenkamp his book has a good chapter showing that market returns have a high correlation with the real earnings yield which was much lower than the nominal earnings yield in the 1970's through early 1980's.

 

Well,

what about 1949? The secular bear ended with a Shiller P/E of 9 and long-term interest rates that were as low as they are today.

I would keep it easy: not only we are in a secular bear for stocks, but we also find ourselves at the end of a 70 years old debt super-cycle. High general stock market prices + High level of debt that must come down = High probability that something might go wrong.

That doesn’t mean something WILL go wrong, but it is enough for me to prefer to be cautious, rather than aggressive, in my investing right now.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

The post 1929 crash US bear market low in 1949 came after one of the most inflationary periods in US history.  The CPI rose from 14.000 in 1941 to 24.500 in late 1948 as the back of post war inflation was finally broken as it was in the 1970's through early 1980's inflation under Volker.

 

Yes, of course war times are inflationary. But what about the 50s? If I were living in 1949 I would be worried about what inflation would be in the 50s, not what inflation had been during the war. My real earning yield would depend on future inflation, not past inflation, right?

Do you think we will see inflation or deflation in the years ahead? If we have inflation, like almost anybody now believes, interest rates will have to rise. And when interest rates rise, the prices of every asset class fall. Vice versa, if we have deflation, stocks will fall.

The fact, I think, is simply that secular bears in stocks end when stocks are very cheap anyway you look at them. Forecasting what future inflation will be is not something people do easily. Secular bears in stocks end when it is very safe to invest aggressively again. Today I simply don’t know of anybody else who could recognize one of those time better than Mr. Watsa. And he is clearly warning that we are not there yet.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[twacowfca]

I think it is very unlikely that the secular bottom was reached in 2009, with a CAPE twice as high as the one reached in 1982.

 

Probably matters to investors what the "real" earnings yield is.  1982 inflation (actual and expected) was very different from 2009 inflation & expectations. 

 

Investors should naturally ask for a higher earnings yield in order to earn a return in excess of the rate of inflation.  No?

 

How about comparing the real earnings yield of the market in 2009 vs 1982?

 

 

That's a good point.  Ron Muhlenkamp his book has a good chapter showing that market returns have a high correlation with the real earnings yield which was much lower than the nominal earnings yield in the 1970's through early 1980's.

 

Well,

what about 1949? The secular bear ended with a Shiller P/E of 9 and long-term interest rates that were as low as they are today.

I would keep it easy: not only we are in a secular bear for stocks, but we also find ourselves at the end of a 70 years old debt super-cycle. High general stock market prices + High level of debt that must come down = High probability that something might go wrong.

That doesn’t mean something WILL go wrong, but it is enough for me to prefer to be cautious, rather than aggressive, in my investing right now.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

The post 1929 crash US bear market low in 1949 came after one of the most inflationary periods in US history.  The CPI rose from 14.000 in 1941 to 24.500 in late 1948 as the back of post war inflation was finally broken as it was in the 1970's through early 1980's inflation under Volker.

 

Yes, of course war times are inflationary. But what about the 50s? If I were living in 1949 I would be worried about what inflation would be in the 50s, not what inflation had been during the war. My real earning yield would depend on future inflation, not past inflation, right?

Do you think we will see inflation or deflation in the years ahead? If we have inflation, like almost anybody now believes, interest rates will have to rise. And when interest rates rise, the prices of every asset class fall. Vice versa, if we have deflation, stocks will fall.

The fact, I think, is simply that secular bears in stocks end when stocks are very cheap anyway you look at them. Forecasting what future inflation will be is not something people do easily. Secular bears in stocks end when it is very safe to invest aggressively again. Today I simply don’t know of anybody else who could recognize one of those time better than Mr. Watsa. And he is clearly warning that we are not there yet.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

Inflation continued to be generally low in the 1950's.  the 1950's was the best decade of all for stock market annual performance with compounded annual returns of  over 19%.

 

However, currently, we are not at bear market lows as in 1949.  Therefore, the market is apt to be choppy going forward as it was in mid to late 1950's.  in the late 1950's, the Fed Chairman, Martin, said his job was to "take the punch bowl away before the party got going."  I don't think Bernanke's there yet.

 

 

 

[meiroy]

 

My timing indicator looks at the amount of expensive junk (companies which are both expensive, and in bad financial shape) in the market. I have been able to backtest starting from 1990, and it has produced 3 signals, 2000, 2007 and now.

 

Note to self: do not buy expensive junk.  Problem solved. Next!

 

[bmichaud]

 

For stocks to be fairly valued here with a 2.5% yield, one must believe in a 4% real growth world. Long run real GR is 3%, so that means 1% deflation. We are running over 2%....

 

I don't follow the computation because I see something missing.  Take WFC for example... only a portion of the cash returned to shareholders comes via the dividends, but you are only capturing the dividends.

 

I'm not sure if my objection matters though -- taken as a whole, how much higher would the dividend yield be if buybacks were totally outlawed and banned?

 

And don't forget the stash that companies keep piling up overseas.  They seem unwilling to pay it out as a dividend because they don't want to pay the US tax on that income.  Again though, I'm not sure how much that moves the needle on dividend yield if you add that in.

 

I think as a whole, the SPX likely breaks even on buybacks - i.e. just offsets dilution. There is a good chart out there somewhere showing how cyclical corporate buybacks are, which likely explains the lack of value they add over time. Plus you would expect per share dividend growth to be higher than the average long-run nominal growth rate for corporate profits - but pretty much no matter what time period you look at, per share dividend growth for the SPX is between 5 and 6% per annum.

 

On my divy analysis, I'm actually giving the SPX the benefit of the doubt. I'm assuming the "normal" DVPS is 50% of $75 of "Schiller" EPS, or $37.50. The latest SPX divy is actually 31.25 or thereabouts.

 

Hussman has a good comment out this week on the corporate cash argument....

 

http://hussmanfunds.com/wmc/wmc130204.htm

 

[Ross812]

I am 17.5% cash right now. If I count the leverage in BAC I am 110% long though. In the past month I sold UPS, RLI, and Power Corp. I bought UPS and RLI in September and sold them after the end of the year run up. There are still some deals to be had right now in the market. I recently added some Chesapeake preferred and Bidvest shares. Fairfax and Intel are still cheap and I've been looking into Fiat and GKK (Thanks Plan!). 

 

You can make yourself sick worrying about whatever metric you want, but even after 2008, the huge pullback in financials in 2011, and whatever comes next, I am pretty sure everyone on this board has made it through alright.

[ERICOPOLY]

Plus you would expect per share dividend growth to be higher than the average long-run nominal growth rate for corporate profits - but pretty much no matter what time period you look at, per share dividend growth for the SPX is between 5 and 6% per annum.

 

So purchasing the market here one could expect to earn 7.5% to 8.5%.

 

2.5% as income from the dividend and another 5% to 6% as capital gain from the growth in the dividend.

 

[bmichaud]

Plus you would expect per share dividend growth to be higher than the average long-run nominal growth rate for corporate profits - but pretty much no matter what time period you look at, per share dividend growth for the SPX is between 5 and 6% per annum.

 

So purchasing the market here one could expect to earn 7.5% to 8.5%.

 

2.5% as income from the dividend and another 5% to 6% as capital gain from the growth in the dividend.

 

Correct.

 

Assuming the SPX is fairly valued at a 9% projected return, FV is 1,250 (37.5/3%). Assuming a 10% FV required return, it is fairly valued somewhere around 940. Either way, there is not a lot of wiggle room up here for the broad indices. 

 

And again, if inflation does in fact tick up, I imagine investors will eventually demand anywhere between one and three points of additional yield to compensate for the inflation corporations are not able to pass through.

[Guest Dazel]

 

Ericopoly,

 

How much rent do you pay if you do not mind me asking...i was just in south beach looking at Condos...more interest than anything else...it has bottomed there and is rising.

 

Dazel

[Guest Dazel]

 

 

If you are trying to market time by jumping in and out of cash you are playing a fool's game...Moore is rich..holding his gains and prudently looking after his clients..as a preference...not market timing...if it keeps going up his clients will still be happy.

 

Buffett's huge wealth was built on holding huge concentrated  bets on Coke, Cap cities-ABC and then Disney, and Geico....through the biggest bull market in history...he was already personally rich without Berkshire.

 

Fairfax is an insurance company and has to hedge accordingly (Sanjeev has mentioned this many times)...for claims, insurance events etc...as Prem said the CDS gains will never be seen again....I will add nor will the bond gains...They are great at what they do...but an individual should not be comparing themselves to them...we use them as a hedge when appropriate (not now).

 

Your cash position should be your own tolerance level...and that of your  "clients" where applicable...most on this board are individuals...so you should invest accordingly.

 

If I gave you a cash allocation it could change tomorrow...we see many opportunities in great long term investments and arbitrage.

 

Dazel.

 

 

 

[longlake95]

cash = ~ 14%. Probably will rise a little more over the balance of the quarter.

[ERICOPOLY]

 

Ericopoly,

 

How much rent do you pay if you do not mind me asking...i was just in south beach looking at Condos...more interest than anything else...it has bottomed there and is rising.

 

Dazel

 

$8k monthly.  It goes up to $8.4k at the end of April -- I have a lease extension until July 2014.

 

[Guest Dazel]

 

 

Thanks Ericopoly.

 

I agree with Moore...you might as well buy it...

 

The old Montra I have heard is that "If it F....k's, Floats or Flies" it is going to cost you.

 

you will be fine under those rules...

 

Dazel.

[Kraven]

 

 

If you are trying to market time by jumping in and out of cash you are playing a fool's game...Moore is rich..holding his gains and prudently looking after his clients..as a preference...not market timing...if it keeps going up his clients will still be happy.

 

Buffett's huge wealth was built on holding huge concentrated  bets on Coke, Cap cities-ABC and then Disney, and Geico....through the biggest bull market in history...he was already personally rich without Berkshire.

 

Fairfax is an insurance company and has to hedge accordingly (Sanjeev has mentioned this many times)...for claims, insurance events etc...as Prem said the CDS gains will never be seen again....I will add nor will the bond gains...They are great at what they do...but an individual should not be comparing themselves to them...we use them as a hedge when appropriate (not now).

 

Your cash position should be your own tolerance level...and that of your  "clients" where applicable...most on this board are individuals...so you should invest accordingly.

 

If I gave you a cash allocation it could change tomorrow...we see many opportunities in great long term investments and arbitrage.

 

Dazel.

 

This was a good post.

[txitxo]

 

My timing indicator looks at the amount of expensive junk (companies which are both expensive, and in bad financial shape) in the market. I have been able to backtest starting from 1990, and it has produced 3 signals, 2000, 2007 and now.

 

Note to self: do not buy expensive junk.  Problem solved. Next!

 

I wouldn't buy cheap junk either...unless, of course, its price is below its net current asset value...

[bmichaud]

Isn't Buffett's mantra, "be fearful when others are greedy, and be greedy when others are fearful"? How can you be greedy if you are already fully invested?

 

And why is holding cash and/or hedging always labeled "timing"? If sentiment and valuations dictate that the risk-reward equation is skewed to the downside, why does being defensive imply trying to "time" when the equation will right-size itself? Valuations and extreme sentiment can continue for a long while, can they not?

[giofranchi]

Fairfax is an insurance company and has to hedge accordingly (Sanjeev has mentioned this many times)...for claims, insurance events etc...as Prem said the CDS gains will never be seen again....I will add nor will the bond gains...They are great at what they do...but an individual should not be comparing themselves to them...we use them as a hedge when appropriate (not now).

 

This I don’t believe is correct. Also Markel is an insurance company, with a stock portfolio which is grater as a percentage of equity than Fairfax’s, and yet they never hedge.

 

What makes sense from a business perspective is to be cautious and conservative when the sea is flat, and to grow by leaps and bounds when the storm brings outstanding opportunities.

 

Investing is the same. That is what Mr. Mellon did, that is what Mr. Buffett did (when a great opportunity came his way he always had the cash available to take advantage of it, always!), and that is also what Mr. Watsa is doing right now.

 

Of course, trading might be different. And maybe a lot of trading opportunities are available now, special situations, arbitrage, deep value cigar butt stocks with a catalyst for the last puff, etc.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[ASTA]

Have 30% cash and 10% dell(hoping its cash equvilent ;D) and 20% ffh

[Guest Dazel]

 

 

Buffett never had enough cash...until he had too much...the first 25 years of investing he was fully invested and stated that if he was managing $10m or so he would

guarantee doing 50% a year...you do not do that holding cash.

 

If you asked Fairfax whether they should have hedged 100% for the last 3 years....what would they say? Now they are stuck..how could you pull hedges now when you did not pull

them during the last 3 years..they will eventually be right...but at what cost? they have lost all of the money they made from the cds' hedging this bull market. Markel did not hedge and are making a killing other than their Fairfax holding. I love Fairfax and would have bought a large amount of shares if they were not hedged...if things get really frothy i will join their hedge..my choice.

 

Hedging was their choice just like everyone here will make...no right or wrong.

 

Prem's rich...and so are all the other Fairfax holding company employees...sound a bit like Moore? Whatever you are comfortable with...but if you are already rich why would take the risk?

 

 

 

Dazel.

 

[giofranchi]

 

 

Buffett never had enough cash...until he had too much...the first 25 years of investing he was fully invested and stated that if he was managing $10m or so he would

guarantee doing 50% a year...you do not do that holding cash.

 

 

That is one of the very few dangerous sentences I heard Mr. Buffett say… Not because it is false, but because it is deceiving for anyone else except Mr. Buffett himself! If you know how to pick investments that will always go up, irrespective of what the markets will do, you should follow his suggestion to be always fully invested. In fact, he probably really is that unique investor! But, if you are a lesser investor, you better acknowledge your “limitations”, and start behaving like a shrewd and opportunistic businessman.

The universe of investments we “mere mortals” really know is limited. And I am sure the stock of every company “I know something about and in the management of which I thoroughly believe” will decline, if the market declines. No doubt about that. So, I will invest at this point, but conservatively and cautiously.

Once again, if you are a trader, in and out of stocks, it is a whole different story.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[locatevalue]

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.

 

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

 

I have about 7% cash, another 8% in a special situation, and 21% in lvlt bond.

 

I haven't heard this argument yet so I will go out and say that S&P500 is at 1500 for the third time in 12 years and  this is the right one. No big decline in sight this time.

 

Okay, special situation people: you must have full allocations by now, so hook us up!  What looks interesting?

 

Sorry, I missed this comment.

My special situation is Metro PCS reverse merger to buy TMobile.

Its a very intresting special situtaion and need to start its own thread..but will provide higlights

1. I am very confident that this merger will gothru as for both parties its mandatory and without it,Its going to be difficult competing with larger comeptitiors like verizona and AT&T

2. Current price values merged company at 8Billion which is 1/2 the market cap i am expecting (Read thru the sec merger doc, PCS its very intresting reverse merger)..They will pay current shareholder $4 special dividend per share on closing of the deal and issure more stock as part of merger and the combined valuations as today price $10 taking out cash dividend is 8.2b and i think it should trade similar or more than sprint cosnidering they dont spend capex like sprint and good FCF.)

[original mungerville]

Fairfax is an insurance company and has to hedge accordingly (Sanjeev has mentioned this many times)...for claims, insurance events etc...as Prem said the CDS gains will never be seen again....I will add nor will the bond gains...They are great at what they do...but an individual should not be comparing themselves to them...we use them as a hedge when appropriate (not now).

 

This I don’t believe is correct. Also Markel is an insurance company, with a stock portfolio which is grater as a percentage of equity than Fairfax’s, and yet they never hedge.

 

What makes sense from a business perspective is to be cautious and conservative when the sea is flat, and to grow by leaps and bounds when the storm brings outstanding opportunities.

 

Investing is the same. That is what Mr. Mellon did, that is what Mr. Buffett did (when a great opportunity came his way he always had the cash available to take advantage of it, always!), and that is also what Mr. Watsa is doing right now.

 

Of course, trading might be different. And maybe a lot of trading opportunities are available now, special situations, arbitrage, deep value cigar butt stocks with a catalyst for the last puff, etc.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

I agree completely with giofranchi. Fairfax is hedging because they see risk in this environment (but they want to exploit their value investing edge to the full extent at the same time) not because they are an insurance company. I believe they would put up to 100% of their book value into stocks unhedged if valuations were reasonable. (This is about the ONLY think I disagree with Sanjeev on!).