Is it better to move to quality instead of cash if market feels fully valued?

[rpadebet]

I have been thinking about this for a while. I have not seen many studies, so thought would ask the members on the board on how they would feel about such a strategy.

 

Market seems to be fairly valued to me. But I am no market timing expert and I have no clue what it will do over the next few years. Parts of my portfolio have reached fair valuation and I am building cash by selling those. I understand the optionality cash provides during a market crash, but it is also a drag on the portfolio returns if you sit on it for a long time.

 

So I was wondering, if it is better to reallocate cash to some fully valued (not absurdly over valued) quality names like Coca Cola, Walmart, Mastercard, American Express, Berkshire Hathaway, Wells Fargo etc. Names with the highest likelihood of survival in case of deflation/inflation/general panic.

 

It is conventional wisdom over here that, such names are best bought in a panic, but who knows when that happens. Also if you look at the last panic in 2008, if you allocated your cash to quality companies at the market bottom, you did well, but not as well as people who invested in some truly undervalued cyclical stuff. Reason being quality names rarely become absurdly undervalued i.e. they tend to hold their value well, so upside is limited to the intrinsic business performance and some multiple expansion.

 

So isn't it better to not hold cash, allocate to these names along side the typical value portfolio, let them run along with the market and if/when panic hits, sell the quality names to raise cash (maybe to opportunistic value investors) and reinvest proceeds in the undervalued stuff?

 

You might want to read up on Bruce Berkowitz.  I'm almost certain that for many years prior to 2008/2009 he used Berkshire Hathaway as a cash alternative in his fund portfolios.  I think he ended up regretting it.  But then again you must remember he managed other people's money that was redeemable during market declines.

 

My two cents:  don't think there is an objectively right or wrong answer, it depends on your skills, preferences, risk tolerance, goals and perhaps, net worth.  Think Klarman at one end of the spectrum and Malone at the other.

 

Good point. Whether the capital  is permanent (own) or redeemable (OPM) makes a difference

[ni-co]

Think Klarman at one end of the spectrum and Malone at the other.

 

Well said! However, keep in mind that Malone insists on owning utility-like businesses with very stable cash-flows and on controlling them.

[stahleyp]

Some other good investor (flagship funds) portfolios. Most of these are value funds but not all.

Percentage of portfolio in cash.

 

IVWIX: 35.84%

LLPFX: 27.11%

SEQUX: 20.24% (not a huge difference from where they usually are)

WPVLX: 29.85%

FLPSX: 14.14%

HSGFX: 45.26%

PVFIX: 47.72%

FPACX: 46.39

 

Low cash balances:

 

FAIRX: 2.28% (I could've sworn that was a lot higher recently) FAAFX: 16.21%

FCNTX: 4.75%

NYVTX: 3.66%

[Haasje]

I think it depends on how much time it will take you to find a good investment and what your investment goal is...

 

yes useful answer  ;D