Why Hold Cash?

[racemize]

Where did you get the 2008 one from, another paper?

I looked it up myself on multpl.com.

 

I'm not quite following, what did you look up on mutlpl.com?  Are you talking about the spread here?

[frommi]

Yes i looked myself but i was wrong it hasn't worked there.

[racemize]

Ok, I've spent a stupid amount of time on this, but regardless, I've made a pretty robust testing model, for any desired market timing strategies.  I've still found nothing that consistently beats the market.

 

The testing model can do the following:

1) incorporates taxes;

2) incorporates turnover;

3) handles partial investment;

4) Goes back to 1890 with a buffer from 1871 for calculating history/percentile information prior to starting.

 

Feel free to duplicate and use it.  The only thing you really need to do is modify the In/Out category to indicate how invested you are (between 0 and 1) per year.  (One tip, highest returns can be generated by determining if the next year is going to go down, and not investing that year.)

 

Report on the spread timing model: I reproduced their outperformance (though to a lesser degree) using spreads to the 1 year (this is what I had data on) and only calculating annually instead of monthly (which I prefer due to short term capital gains taxation).  Their time period was 1970-2000.  It also outperformed from 1970-2013.  It appears to have some outperformance up to 1920.  It definitely does not outperform from 1920-1970.  Thus, it does not appear to do all that well out of sample, and/or it appears that the 1970 period is somewhat unique (particularly the degree of outperformance).  It does not appear to be trustworthy.

 

Did not find any reasonable CAPE uses that resulted in outperformance.

 

Feel free to duplicate the spreadsheet and test whatever you want.  I'm interested in any reasonable models that work (and not just fine tuning variables until it works).  It's also fun to play with.

 

Let me know if you have any ideas/questions/notice any problems with the spreadsheet.

 

https://docs.google.com/spreadsheets/d/1i8Q6QKJe_BrJ9LJ0vYvIgpfNKUt0HRzHQevE0ODRF1Q/edit?usp=sharing

[Liberty]

Thank you racemize!

[frommi]

Side note: I really wanted to find out that holding cash was prudent and the right thing to do.  It made sense in my head.  I wanted to be contrarian and hold cash as the market went up and deploy it on the bottom.  I've just not been able to confirm that it works better.  I really don't like the fact that if you are 100% invested, that crash is going to hurt, and you likely won't be able to buy at the bottom, but that's what everything I've tested has said, unless your portfolio volatility is very very high (like Pabrai's was in 2008, and even with that, it was better for him to be 100% invested for his longer run, first fund).

 

Thank you! Now that leaves just one question, what is the optimum leverage for a given maximum portfolio drawdown? :)

[Shawn]

I think Sam Mitchell said it best - in the longrun reality catches up - or something to that effect LOLOL. I think if you can discipline yourself to hoard cash and then allocate it when there's "blood in the streets" and do that periodically over time that's ideally a great approach to take. Simple yet most have issues sitting still. I don't think one would be wrong to even hold large cash balances at this point in time. That's how I'm starting to look at things today, I haven't found too many companies worth buying outside of BAC, AIG, BP and maybe a few other names but even then, there aren't many "cheap" companies. Plenty of moderately priced businesses tho. I think for now I'm going to hoard cash until a "no-brainer" appears and is worthwhile.

 

I don't need markets to come down X amount of percent - I just need 1 maybe 2 companies that would meet my criteria otherwise, to get hit with some sort of calamity that causes the market to act irrationally and sell it to me for a price I'd like ;D  I'd like to think that at least 1 of those occurs once a year or two.

[racemize]

I think Sam Mitchell said it best - in the longrun reality catches up - or something to that effect LOLOL. I think if you can discipline yourself to hoard cash and then allocate it when there's "blood in the streets" and do that periodically over time that's ideally a great approach to take. Simple yet most have issues sitting still. I don't think one would be wrong to even hold large cash balances at this point in time. That's how I'm starting to look at things today, I haven't found too many companies worth buying outside of BAC, AIG, BP and maybe a few other names but even then, there aren't many "cheap" companies. Plenty of moderately priced businesses tho. I think for now I'm going to hoard cash until a "no-brainer" appears and is worthwhile.

 

I don't need markets to come down X amount of percent - I just need 1 maybe 2 companies that would meet my criteria otherwise, to get hit with some sort of calamity that causes the market to act irrationally and sell it to me for a price I'd like ;D  I'd like to think that at least 1 of those occurs once a year or two.

 

I think for individual companies, that probably works.  It's hard to really know for sure, but it is very similar to just having a high bar for your investments, which is an individual thing.  What I'm trying to focus on here is the situation where you still have ideas that meet your investment hurdle/criteria, but are considering holding cash for other reasons (e.g., in order to have money to put in at the bottom).