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I Worry About "The Shot Heard Around The World"


Parsad

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I'm getting more and more freaked out about what I see in the markets.  Cash is flooding in...great, because the funds are up big...but very, very disconcerting as investors continue to accept very low risk premiums.  The cash continues to build! 

 

Anyone else getting worried?  Cheers!

 

Why worry? Worry about what?

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I'm getting more and more freaked out about what I see in the markets.  Cash is flooding in...great, because the funds are up big...but very, very disconcerting as investors continue to accept very low risk premiums.  The cash continues to build! 

 

Anyone else getting worried?  Cheers!

 

The fact that JCP just announced dreadful earnings that were worse than expectations, and the stock is rallying 8% might be a sign that the market is overextended.

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I'm getting more and more freaked out about what I see in the markets.  Cash is flooding in...great, because the funds are up big...but very, very disconcerting as investors continue to accept very low risk premiums.  The cash continues to build! 

 

Anyone else getting worried?  Cheers!

 

I will know that Parsad is truly worried when he discloses that he is selling off his BAC Warrants. Ladies and gentlemen, that would be the market top.

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In the last few weeks, I've been thinking about taking some money off the table.  But so far, it's only thinking and not doing.  On the one hand I think to myself that certain equities have run up a lot in a short amount of time and that they are approaching close to full valuation.  For me, this would mean I should sell regardless of general market conditions.  On the other hand, I think to myself that we aren't anywhere near the point where the average man on the street has started to think they have go all-in on stocks because they don't want to miss out on potential gains.  I guess I'm wondering whether we value-minded folks are right but early in thinking about lightening up.

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txitxo

 

any stock recommendation from europe?

 

hy

 

I am buying lot of little  companies, selected using mechanical investing. But probably most people here will find more interesting to peruse the holdings of the Bestinver funds, who are classical, Buffett-style investors. Their top euro holdings (>5%) are Exor, Wolters Kluwer, BMW, Thales. Their top iberian holdings (>5%) are Semapa, Sonae, Portugal Telecom, Corporación Financiera Alba, Acerinox.

 

 

 

 

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I have a question for the board regarding cash:

 

Lets say one has 100% of their assets invested in BRK;

 

BRK's market cap is ~ 270B and @50Bil of that (or ~ 20%) is held in cash by Warren.

 

Would anyone look at this as "having" 20% in cash, with Mr. Buffett waiting to invest it for you?

 

Can this act as a type of hedge?

 

Thoughts?

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In the last few weeks, I've been thinking about taking some money off the table.  But so far, it's only thinking and not doing.  On the one hand I think to myself that certain equities have run up a lot in a short amount of time and that they are approaching close to full valuation.  For me, this would mean I should sell regardless of general market conditions.  On the other hand, I think to myself that we aren't anywhere near the point where the average man on the street has started to think they have go all-in on stocks because they don't want to miss out on potential gains.  I guess I'm wondering whether we value-minded folks are right but early in thinking about lightening up.

 

History doesn't repeat, but rhymes.

 

There is no absolutely guarantee that the average guy on the street will be stock crazy for decades to come. Last time that happened before the late 90s, it was in 1920s. That is a 70 year gap. During those 70 years, there were plenty of times when the market hit various valuation highs.

 

Personally, I don't want to wait for the history to repeat, while it ends up rhyming with a note that isn't as high as the last one.

 

 

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txitxo,

you already know we have different views here… If the US stock market crashes, every other market all around the world will follow suit. Valuations, pessimism, etc. won’t matter at all. I don’t know of a single instance in which the US stock market crashed and Europe’s instead proceeded undisturbed! Not a single one. I don’t see why this time should be different: imo, everything will fall together.

 

giofranchi

 

  Oh yes. I am pretty sure of that. No doubt that both markets will move in tandem. But certainly not by the same amount. If Euro stocks go down by 50%, we would be at a secular, once-in-a-generation, Shiller P/E =7 bottom. After that you can put all you own in stocks and sleep tight for the next 15-18 years. But if the US market goes down by 50%, you are only at a Shiller P/E of ~12...and you may get another 40% drop to a secular bottom.

 

To put it in a nutshell: if US stocks keep rising, the odds are that EU stocks will rise much faster, and if US stocks crash, EU stocks will drop by much less.

 

 

 

 

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History doesn't repeat, but rhymes.

 

There is no absolutely guarantee that the average guy on the street will be stock crazy for decades to come. Last time that happened before the late 90s, it was in 1920s. That is a 70 year gap. During those 70 years, there were plenty of times when the market hit various valuation highs.

 

Personally, I don't want to wait for the history to repeat, while it ends up rhyming with a note that isn't as high as the last one.

 

I would disagree.  There was plenty of stock craziness at various times during the mid 2000s, 1980s, 1960s and 1950s.  It wasn't just the late 90s and 20s.  Whether or not the market is crazy now I will leave to others, but from the information I have both retail and pension funds, endowments, etc have yet to jump in here.  Doesn't mean they will of course, I have no idea.  But IF they did, things could get truly insane.

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Looks like Prem might have been right all along. We are in yr 5 after the crisis. He could make up for all the lost time pretty quickly if this scenario plays out.

 

People are getting excited about mkts.

Reaching for yield and income.

 

Reality:

US is slow

Europe has issues

BRICs are not growing as fast

corporate profits are high and could contract

 

Central banks and govts are maxed out. Cant juice markets much more.

 

Time to be defensive.

 

Many of those realities have existed for a while. All these realities are fine but unless you know how they are going to impact your individual chosen businesses they are irrelevant. Not able to find cheap stuff is different issue. You are focusing on unknowns and also trying to guess how those unknowns are going to effect your holdings.

 

I don't have any expertise to predict time line for those above listed factors like Europe having issue or US growing slow. More importantly, if few selected businesses are likely to do well despite all those problems then I am focusing on irrelevant stuff. Amount of cash I hold is directly proportional to the amount of undervalued businesses I can find. It has absolutely nothing to do with above listed factors. Yaah, it's good to be aware of extreme situations to see if you are going to have tailwind or head wind but US is not in extreme situation right now.

 

I am building more cash but it has nothing to do with any of the above listed factors. I will welcome volatility any time even if I am invested 100%.  That's how I see it.

 

 

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History doesn't repeat, but rhymes.

 

There is no absolutely guarantee that the average guy on the street will be stock crazy for decades to come. Last time that happened before the late 90s, it was in 1920s. That is a 70 year gap. During those 70 years, there were plenty of times when the market hit various valuation highs.

 

Personally, I don't want to wait for the history to repeat, while it ends up rhyming with a note that isn't as high as the last one.

 

I would disagree.  There was plenty of stock craziness at various times during the mid 2000s, 1980s, 1960s and 1950s.  It wasn't just the late 90s and 20s.  Whether or not the market is crazy now I will leave to others, but from the information I have both retail and pension funds, endowments, etc have yet to jump in here.  Doesn't mean they will of course, I have no idea.  But IF they did, things could get truly insane.

 

Based on what financial history I have read, the 1929 and 1999 were the only times I heard of every average person and their dog wanting  to be in the stock market. Perhaps you are right about similar mass hysteria in the times in between.

 

However, I think we agree that things never do and certainly don't have to repeat exactly.

 

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txitxo

 

any stock recommendation from europe?

 

hy

 

I am buying lot of little  companies, selected using mechanical investing. But probably most people here will find more interesting to peruse the holdings of the Bestinver funds, who are classical, Buffett-style investors. Their top euro holdings (>5%) are Exor, Wolters Kluwer, BMW, Thales. Their top iberian holdings (>5%) are Semapa, Sonae, Portugal Telecom, Corporación Financiera Alba, Acerinox.

 

There is a small contingent on the board interested in the non-Buffett companies that you're buying in Europe.

 

I have a lot of EUR and GBP burning holes in my pocket waiting to be invested in some tiny no name go nowhere company at a ridiculous valuation.

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  Oh yes. I am pretty sure of that. No doubt that both markets will move in tandem. But certainly not by the same amount. If Euro stocks go down by 50%, we would be at a secular, once-in-a-generation, Shiller P/E =7 bottom. After that you can put all you own in stocks and sleep tight for the next 15-18 years. But if the US market goes down by 50%, you are only at a Shiller P/E of ~12...and you may get another 40% drop to a secular bottom.

 

To put it in a nutshell: if US stocks keep rising, the odds are that EU stocks will rise much faster, and if US stocks crash, EU stocks will drop by much less.

 

Is it fair to compare these two markets like that?

 

Say you have two companies, EuroCorp and AmeriCorp.  They are exactly the same in every respect except that EuroCorp is based in Paris, and AmeriCorp is based in Chicago.  Which would you rather invest in, given equal valuations?  Doesn't that say something about why the European market looks so cheap on paper?

 

This shouldn't become a political thread, but I think we can all agree that the American capitalistic system is significantly more efficient than the European capitalistic system.  Which system you operate in will impact your business' fortunes.

 

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History doesn't repeat, but rhymes.

 

There is no absolutely guarantee that the average guy on the street will be stock crazy for decades to come. Last time that happened before the late 90s, it was in 1920s. That is a 70 year gap. During those 70 years, there were plenty of times when the market hit various valuation highs.

 

Personally, I don't want to wait for the history to repeat, while it ends up rhyming with a note that isn't as high as the last one.

 

I would disagree.  There was plenty of stock craziness at various times during the mid 2000s, 1980s, 1960s and 1950s.  It wasn't just the late 90s and 20s.  Whether or not the market is crazy now I will leave to others, but from the information I have both retail and pension funds, endowments, etc have yet to jump in here.  Doesn't mean they will of course, I have no idea.  But IF they did, things could get truly insane.

 

Based on what financial history I have read, the 1929 and 1999 were the only times I heard of every average person and their dog wanting  to be in the stock market. Perhaps you are right about similar mass hysteria in the times in between.

 

However, I think we agree that things never do and certainly don't have to repeat exactly.

 

I would agree that the late 20s and late 90s were likely the periods in the US at least of highest mass insanity for stocks.  However, there was plenty of love for stocks in the other periods I mentioned.  I would posit that we are no where near any of those periods at the current time.  While those of us immersed in day to day investment activity, like the folks on this board, certainly feel that it's there, I don't believe the average person is stock mad like any of these other times.  In fact, it's the opposite, they are scared shitless about the market.  So what does that mean?  I have no clue.  I do agree that things don't usually and don't have to repeat exactly so it is very possible that the average person doesn't jump on board this time.  However, one can usually rely on either greed or fear at all times.  I think for most people it's been fear ever since the financial crisis and certainly once you add in the early 2000s and the flash crash in 2010.  Never underestimate though that drooling greedy monster that resides in most people. 

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Wise words!

 

My portfolio seems to be going up everyday - that is not normal. I am trying to cash out of anything that is closer to fair value and potentially not a long term hold.

 

There could be better opportunities in the future.

 

The odds are against the market going up even though my portfolio is cheap. Thus, my portfolio could still get hit.

 

Also, note cash amounts:

Buffet - $49B

FFH - 8B or 30% and hedges

Klarman - 30%

Chou - is about 20% and increasing

Berkowitz is at 30%

and you could go on.

 

Assets are generally inflated and thus, as a disciplined value investor one needs to pull back and accept that the market could conitnue its run just like in 1999. But could present opportunities later and the dry powder will help. Need to be patient and let the herd do its thing.

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I have a question for the board regarding cash:

 

Lets say one has 100% of their assets invested in BRK;

 

BRK's market cap is ~ 270B and @50Bil of that (or ~ 20%) is held in cash by Warren.

 

Would anyone look at this as "having" 20% in cash, with Mr. Buffett waiting to invest it for you?

 

Can this act as a type of hedge?

 

Thoughts?

 

In short -- Nope.

 

The experience of 2008/09 for BRK and FFH should be a good example of how strong companies like BRK and perfectly positioned companies like FFH still get taken to the woodshed in a significant market correction.  Perhaps they didn't get hit as badly as the rest of the market, but they weren't a hedge.  BRK held up a little better early on, but peak to trough still lost 50% during the correction.

 

Having cash available in late 2008 and early 2009 to buy insanely cheap stocks did much better than BRK through 2010.  Buying SHLD under 30 and Timberland and Gentex under $10 and seeing them double and triple by the end of 2010 was much much better than holding BRK.

 

Cash and puts can be good hedges for market risk, but even the best stocks are not.  That's my lesson from 2008/09 anyway. 

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I think this worry is over rated. Just because an index is making a new high grabs headlines.

 

I was worried too much in the first quarter of 2013. I have 60% cash. I changed my mind. Here is why, when everybody is expecting a correction market goes up. Even today, WSJ paper edition had statistics about how Dow has never behaved like this except in 1958(??).

 

For the market to correct, we need everybody to get euphoric. Right now it is not there.

But sentiments change quickly. But having said that, i have to say that the leverage utilized is high(somebody with Bloomberg terminal can take a snapshot), Shiller PE is high, Total Marketcap / GDP is high, Profits as percent of GDP is high and VIX is at an all time low!!. Everything points to a correction.

 

Yet we have not seen one.

 

ABout investment gurus with high cash, i think for some it is normal to have high cash positions. Unless they go out of their usual range, i wouldnt get worried.

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Two things I have been thinking about:

 

1. Looking at some of the stocks I own for example BAC, AAPL and AIG are they fairly valued or overvalued? I don't think so. Yet we are still seeing new market highs. Despite the gains in these positions I am not inclined to sell these positions at these prices. I think these companies will be worth much more in the years to come.

 

2. Having recently read "The most important thing", I look at the sentiment and we are far from a "Everything will be better forever attitude".

 

I am a macro dummy so I have to stick to what I know which are basic things like these 2 points.

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I think this worry is over rated. Just because an index is making a new high grabs headlines.

 

I was worried too much in the first quarter of 2013. I have 60% cash. I changed my mind. Here is why, when everybody is expecting a correction market goes up. Even today, WSJ paper edition had statistics about how Dow has never behaved like this except in 1958(??).

 

For the market to correct, we need everybody to get euphoric. Right now it is not there.

 

This is what worries me.  You had a ton of cash in Q1 and then you changed your mind and invested...not based on fundamentals, but market psychology. 

 

While some of our investments remain undervalued, there are several we have sold and are getting out of.  I'm looking at the companies on my watch list, and virtually all that I watch are far above prices I would pay...that's about 200 stocks. 

 

I don't expect 2008/2009, but the faster capital flows into stocks, and the faster that risk premium shrinks, the larger the eventual correction will be...and it will be quick with all of these HFT's kicking in.  I'm happy to wait for a fat pitch with alot of cash on the side.  Cheers!   

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Here's another data point, I've had a few net-nets I invested in this year that have risen to NCAV or above in less than six months. These are all 50%+ gains on stocks left for dead. These same companies with checkered pasts are reporting record profits, not a red flag but yellow for sure.

 

I'm about 30% cash overall.

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My portfolio seems to be going up everyday - that is not normal. I am trying to cash out of anything that is closer to fair value and potentially not a long term hold.

 

There could be better opportunities in the future.

 

The odds are against the market going up even though my portfolio is cheap. Thus, my portfolio could still get hit.

 

Also, note cash amounts:

Buffet - $49B

FFH - 8B or 30% and hedges

Klarman - 30%

Chou - is about 20% and increasing

Berkowitz is at 30%

and you could go on.

 

Assets are generally inflated and thus, as a disciplined value investor one needs to pull back and accept that the market could conitnue its run just like in 1999. But could present opportunities later and the dry powder will help. Need to be patient and let the herd do its thing.

 

I don't think there is much to read into on BRK's cash. They have tons of cash coming in and there is a finite amount of investments in the world that can mop up that cash.

 

I am not an FFH expert but I would expect to see them grow their cash over the years regardless. Prem expressed at the annual meeting that they would love to get to the point where they have a much larger cash cushion like BRK so they don't have to worry about hedging. So over time I would expect that number to go up regardless of what is going on in the market.

 

Berkowitz has to deal with withdrawals and was burned because of this. He needs that cash to deal with inflows and outflows. Chou is in the same boat. At the Ivey conference Chou mentioned that there is an overhead you suffer on your returns when you run mutual fund. Part of that overhead is the amount of cash he needs to keep around.

 

I love Klarman and respect him a great deal, but I generally throw him into the too hard pile when trying to figure out what he is doing.

 

*UPDATE: When I said Chou is the same boat as Bruce I meant with regards to running a mutual fund, not getting burned on redemptions. I don't think he suffered from that like BB did.

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