buying large cap value stocks as cash and cash equivalents?

[randomep]

Large cap stocks never go down.  They never cut their dividends either.  Large cap investors are 100% rational and never sell their shares in a panic.

 

Can't wait for "Guys think it's safe for me to park my money in Franky and Pauly's Biotech-o-rama stock with a $2m mcap?  Seems pretty safe to me, plus they're on the verge of a break though.  Safety and riches rolled into one!"

 

I am wondering what the board traffic will be like when we have a major correction in the markets.  My guess is it will be very quiet.

 

I think the opposite. I think it will be just as loud but the tone will just be negative.

 

so what was this forum like in 2008-2009?

[Uccmal]

Large cap stocks never go down.  They never cut their dividends either.  Large cap investors are 100% rational and never sell their shares in a panic.

 

Can't wait for "Guys think it's safe for me to park my money in Franky and Pauly's Biotech-o-rama stock with a $2m mcap?  Seems pretty safe to me, plus they're on the verge of a break though.  Safety and riches rolled into one!"

 

I am wondering what the board traffic will be like when we have a major correction in the markets.  My guess is it will be very quiet.

 

I think the opposite. I think it will be just as loud but the tone will just be negative.

 

so what was this forum like in 2008-2009?

 

There were a handful of us investing hand over fist in early March 2009.  Others were sitting on their hands waiting for the markets to drop further.  Have a look at some of the threads at the very beginning of this message board.  It starts in February 2009.  Unfortunately, the earlier board is mostly lost.  You can google specific topics and get threads from the earlier board but the greater context is lost. 

 

I can look back and see what I was thinking 6 years ago, which is an awesome feature as I dont keep a diary. 

 

There is no reason to suggest that people will behave any differently when there is another correction or bear market. 

[wachtwoord]

I imagine that next time this happens I'll be buying way too soon. I have yet to find a way to avoid buying too soon (unless averaging down counts).

[Jurgis]

OT.

 

The way to buy not too soon is to receive a large cash inheritance just as markets are bottoming.  ;D

 

This was one of my secrets in 2007-2009 crisis. ;)

[Mephistopheles]

Re: Berkshire. I agree that even it isn't a replacement for cash. It's a great company but opportunity cost affects it just like it affects every other asset in the world. 1.4x is reasonable now, but if the S&P is down 30%, then it becomes expensive.

 

I've heard several people say that the buyback is like having a put at 1.2x. But I don't think this is anywhere near bulletproof for several reasons:

1) Buffett might find better use for the cash in a market crash.

2) BV would likely suffer in a bear market.

3) People will sell willingly at quite a bit less than 1.2x if they think they can get better deals elsewhere.

4) Index and mutual funds would be forced sellers at any price. This would significantly compensate for the (as of now) $40 billion excess cash balance assuming it is all used for a buyback, which is highly unlikely due to reason #1.

 

So if Berkshire isn't a good cash equivalent, no company is. There is no free lunch. The best we can do is invest in stocks with a large margin of safety, and hold cash if no such bargains are to be found.

[jschembs]

Re: Berkshire. I agree that even it isn't a replacement for cash. It's a great company but opportunity cost affects it just like it affects every other asset in the world. 1.4x is reasonable now, but if the S&P is down 30%, then it becomes expensive.

 

I've heard several people say that the buyback is like having a put at 1.2x. But I don't think this is anywhere near bulletproof for several reasons:

1) Buffett might find better use for the cash in a market crash.

2) BV would likely suffer in a bear market.

3) People will sell willingly at quite a bit less than 1.2x if they think they can get better deals elsewhere.

4) Index and mutual funds would be forced sellers at any price. This would significantly compensate for the (as of now) $40 billion excess cash balance assuming it is all used for a buyback, which is highly unlikely due to reason #1.

 

So if Berkshire isn't a good cash equivalent, no company is. There is no free lunch. The best we can do is invest in stocks with a large margin of safety, and hold cash if no such bargains are to be found.

 

Very well said on all fronts.

[Uccmal]

You guys are entertaining the impossible:

1) trying to predict markets

2) trying to time your predictions

 

My way of handling this is to stay fully invested, with dividends coming in the door.  If something amongst my existing holdings is on sale I will deploy the dividend cash, otherwise I will sit on it.  I have definitely moved to less risk, getting rid of nearly all my LEAPS, but it is partly my circumstances.  For two years Leaps have been a mixed bag, and have become a drag on returns anyway. 

 

The best one can do is stay the course with their own style, and perhaps raise some cash, along the way.  Deliberately selling out JUST to raise cash makes no sense when central banks worldwide have their pedal to the metal. 

[Range]

Thanks for all the input guys. My ego just took a thrashing from all the comments but i definitely learned a lesson. I'm also glad that I'm not the only one to make this mistake.

 

Hi jawn619,

 

You're in very good company in terms of holding large cap value stocks (with a yield) as an alternative to cash as Charlie Munger might even agree with you.

 

Have a look at Munger's answer to question #31 of this year's Berkshire Hathaway AGM Q&A

http://www.cornerofberkshireandfairfax.ca/forum/events/berkshire-2015-annual-shareholders-meeting-qa-notes/msg220915/?topicseen#msg220915

 

While this is not a transcript, I was at the meeting and was quite surprised with Charlie's answer as my thinking is more in line with comments on this thread.

 

Before I also get destroyed by others for this comment, I'd just like to mention that I am aware that Charlie has also mentioned several times that he has sat on millions in cash for years while waiting for a chance to swing and that this answer was probably more applicable to BRK's portfolio than an individual's portfolio.

 

Interesting answer nonetheless!

 

Cheers!

[Mephistopheles]

Re: Berkshire. I agree that even it isn't a replacement for cash. It's a great company but opportunity cost affects it just like it affects every other asset in the world. 1.4x is reasonable now, but if the S&P is down 30%, then it becomes expensive.

 

I've heard several people say that the buyback is like having a put at 1.2x. But I don't think this is anywhere near bulletproof for several reasons:

1) Buffett might find better use for the cash in a market crash.

2) BV would likely suffer in a bear market.

3) People will sell willingly at quite a bit less than 1.2x if they think they can get better deals elsewhere.

4) Index and mutual funds would be forced sellers at any price. This would significantly compensate for the (as of now) $40 billion excess cash balance assuming it is all used for a buyback, which is highly unlikely due to reason #1.

 

So if Berkshire isn't a good cash equivalent, no company is. There is no free lunch. The best we can do is invest in stocks with a large margin of safety, and hold cash if no such bargains are to be found.

 

Very well said on all fronts.

 

Thanks :)

[Mephistopheles]

Thanks for all the input guys. My ego just took a thrashing from all the comments but i definitely learned a lesson. I'm also glad that I'm not the only one to make this mistake.

 

Hi jawn619,

 

You're in very good company in terms of holding large cap value stocks (with a yield) as an alternative to cash as Charlie Munger might even agree with you.

 

Have a look at Munger's answer to question #31 of this year's Berkshire Hathaway AGM Q&A

http://www.cornerofberkshireandfairfax.ca/forum/events/berkshire-2015-annual-shareholders-meeting-qa-notes/msg220915/?topicseen#msg220915

 

While this is not a transcript, I was at the meeting and was quite surprised with Charlie's answer as my thinking is more in line with comments on this thread.

 

Before I also get destroyed by others for this comment, I'd just like to mention that I am aware that Charlie has also mentioned several times that he has sat on millions in cash for years while waiting for a chance to swing and that this answer was probably more applicable to BRK's portfolio than an individual's portfolio.

 

Interesting answer nonetheless!

 

Cheers!

 

I am just guessing here, but his answer might be geared towards someone with a "hold forever" mentality, in which case the reliable dividends of big blue chips are better than the rate on CDs, for instance. I can't imagine him suggesting this for the sole purpose of parking cash to redeploy in a bear market. Nor can I imagine him ever thinking of doing this with the $20 billion minimum cash cushion that Buffett demands, for which they don't even buy treasuries with a longer than 3 month duration.

[KinAlberta]

Is there an expectation that low rates combined with subtle inflation will destroy the processing power of cash so buy the market and ride out any volatility.

 

Folks, I think this is the right place - can you help me out here...

 

I'm going to bring in my comments from another forum where I tried to find a good answer and confirm my thinking about holding cash. (I'm Albertasunwapta by the way.)  I won't bring in other poster's comments, that may be inappropriate, but will provide the thread link.

 

I hope people can follow my thoughts/reasoning and evolution therein. ...  I'd like your thoughts...  I'm just trying to invest and survive and hopefully come out ahead.  I don't profess to know any of the answers so critique away, please.

 

 

 

Thinking Differently ...

 

AlbertaSunwapta - 1 year ago - Edit

Great discussion. I have something for you to ponder for a second or two. (Note, I'd like to leave bonds, PE, alts, out of this simplified abstraction or speculation if possible.)

 

So, on sitting on the sidelines, I've never been satisfied with my approach. I choose cash (or sometimes bonds), always have, and have sat for years with uncomfortable levels of cash if not raising cash levels (eg. 2004-2008). A year ago I started moving to cash and by May I'd gone substantially to cash. Lately I've bought a couple positions but still sit mostly in cash and short term fixed income instruments. If instead of cash I'd bought a market equity index I'd be substantially ahead. For decades I've wondered whether my shifts to cash were a sensible strategy. In fact years ago I asked on this board why Buffett would go to cash and not a market index, but didn't get much in the way of considered opinions.

 

So, correct me where I'm wrong.

 

The future is uncertain so all attempts at valuation are almost certainly flawed. (Hence one of the reasons behind the need for a margin of safety.)

 

All value investors have, or like to think they have, a circle of competency. Many investors regularly stray from any circle of competency (leakage) as they try to expand that circle.

 

Correctly judging whether a stock or sector is over or under valued requires competence in valuing that company or sector (or cross-sector aspect of business).

 

Value investors that can't find undervalued stocks are necessarily looking only at stocks within their circle of competence. Thus individual investors can't say with much certainty whether the market itself is under, over or fairly valued only that they can't find value in their circle. The fact that they also stray means that even composite measures of value investor positions can't truly determine whether such value investors in aggregate see the market itself as under, over or fairly valued.

 

When value investors can't find value they often sit in cash so they gain optionality, etc. but they are quite likely to incur the opportunity cost mentioned above.

 

As a result of choosing cash over market indexes, value investors are essentially (overtly or covertly) market timing as well as making a forecast that companies within their circle of competence will within a reasonable time return to value.

 

That said, I look to other sources and metrics to assess the condition of the overall equity market(s) Plus as those metrics align, I look for companies that will behave opportunistically in a declining market. (This hasn't worked out well, as they freeze up too.)

 

Now as a long term investor wouldn't it make more sense to me to move between individual 'value investments' and market indexes - rather than cash? "

 

 

...

 

AlbertaSunwapta - 1 year ago - Edit

 

^ I don't see it as letting Mr. Market being my master and not my servant. Instead it's looking at market metrics and changing my capital allocations. Note that I was a heavy buyer throughout the depths of the crisis and again in the fall of 2011's crisis. Here's Jeremy Gratham discussing value investing:

 

 

 

"When you buy a stock, because it has surplus assets or a good yield or a great safety margin, you are really making a bet on regression to the mean. We are really counting on the fact that current unpopularity will fade, that the current problems in the industry will dissipate, and that the fortunes of war will move back to normal. Well, as a provable, statistical fact, industries are more dependably mean-reverting than stocks, for individual stocks can on rare occasion, permanently change their stripes à la Apple. (Or is that à l’Apple?) Sectors, like small caps, are more provably mean-reverting than industries. The aggregate stock market of a country is more provably mean-reverting when mispriced than sectors. And great asset classes are provably more mean-reverting than a single country. Asset classes are the most predictable of all:..."

 

"So it’s simply illogical to give up the really high probabilities involved at the asset class level. All the data errors that frighten us all at the individual stock level are washed away at these great aggregations. It’s simply more reliable, higher-quality data." - source: Playing with Fire Q1, 2010, Part 1: “Friends and Romans, I come to tease Graham and Dodd, not to praise them.” (On the potential disadvantages of Graham and Dodd-type investing.)

 

Jeremy Grantham

 

 

...

AlbertaSunwapta - 1 year ago - Edit

I should have added that the majority of my sales last fall were index funds. In mid May I exited more index funds as well as sold off individual share positions. I still hold some significant equity positions. Some are quite old positions (20 years), to which I've added more shares in the past 6 months. Some of the shares I sold were acquired in March and April of 2009 so I've not been affected by doomsayers in the interim.

 

You'll note that many gurus on this site have also exited positions or had positions mature, without reallocation to new value positions. Their cash positions are rising to high, if not record levels.

 

My view is that the further we progress in time without having either a recession or a major market retreat, the more likely it gets that one will occur in the near term. Pretty simple logic. Using market metrics to judge index holdings seems reasonable. That said, I've missed some of the gains from the 2013 winter/spring run up by playing it safe. My view is that fairly valued markets don't necessarily have to move into overvalued markets. They may fluctuate between undervalued and fairly valued. For example much of post WWII America until the 1970s. Today though, it seems that there are a number of potential catalysts that could trigger a market drop but fewer except the "confidence game" played by a continuation of QE-forever that could drive it substantially higher. (How much more can capital structures and profit margins benefit?)

 

Also, holding some stocks with less certain long term prospects (i.e technology such as Google, Microsoft, Qualcomm, etc.) into a recession of indeterminate length means that obsolescence might begin to occur in generally undervalued market conditions. To me exiting such positions prior to a downturn in prices makes more sense than holding with a faith based plan to buy more in any downturn. However companies like KO, BRK, etc. where the post recession company is likely to be even stronger, can be held and further accumulated. (Aging demographics plays and resource deletion plays such as SU, POT, SQM might qualify now too.)

 

One tactic worth discussing is that of gurus who continue to stock pick while hedging their portfolios but hedging the market. So no they are not really hedging their portfolios. These are I imperfect hedges yes, but like being put into quality value shares, aimed at levering up on market volatility. I believe Watsa and Einhorn may be doing this. So in a sense they are not sucking their thumbs.

 

 

...

AlbertaSunwapta - 1 year ago - Edit

"They can go higher, lower, or nowhere from here - as is always the case." Yes, exactly. In other words, the wait may be very, very painful. The flip side of a so called value trap situation could be a cash trap. (We're very reliant on both volatility and regression to the mean.)

 

Now, per my first post, if you can't find bargains within your circle of knowledge, why go to cash (or bonds, etc.)? Why not allocate all or substantially all or even 50% to equity index funds or ETFs ? Why sell a fully or overvalued position and then put the proceeds into cash? (Answer: On first thought one would say for certainty and carrying "a loaded gun", but...)

 

 

AlbertaSunwapta - 1 year ago - Edit

So, is one comfortable holding their shares in such a market? If one owns good stocks that one is willing to hold for the long term (as in through a major recession) that are also in that zone, it seems reasonable to hold them and hope for a decline in their value for additional accumulation.

 

Good stocks that may not be good for the long term (many technology companies) are another matter. My view is that if those reach what can best be described as their fair / reasonable value the next question is their expected lifespan and any possibility of positive future growth (market expansion, new products, improved moat...) as well as the probability of a recession hitting and good old price correlation taking away a lot of the risk associated with all that value uncertainty.

 

Those that own the market (through indexes and ETFs) at fair value have to decide whether they are going to own the market long term and just accumulate on declines, or raise cash and 'hope' for a decline in the market. Again, "My view is that fairly valued markets don't necessarily have to move into overvalued markets. They may fluctuate between undervalued and fairly valued." Since I am risk adverse in terms of my index and technology shares, I've raised cash by selling them.

 

...but as I've tried to ask in postings above, the overall market is beyond my circle of competence so should I have continued to hold the market? Why ever raise cash, if not for a belief in correlation between overvalued circle of competence shares and the overall market?

 

Why not forever allocate between circle of competence shares and the market rather than selling and raising cash?

 

 

 

http://www.gurufocus.com/news/234561/thinking-differently--value-investors--rising-markets

[KinAlberta]

How about Dividend Capture?

 

I'm just wondering if anyone employs any kind of dividend capture strategy(s).

 

It's nothing I've ever bothered to pursue or even research as I was never very concerned about receiving dividends but I'm now thinking that is might have been a neat strategy to employ throughout my life.  Say, as the various bull markets "aged" one would adopt a near periodic strategy (based on age or percentage return or some measure) to limit one's exposure to the market by being out of the market most days but in it to capture the dividends.  In a non-taxable account, one could basically be a hybrid-buy-and-hold investor that switches to a dividend capture strategy at some period in a bull market and continues the practice until some predetermined percentage market drop occurs (say around the median recessionary % drop), and then return to the buy and hold strategy to ride the market the rest of the way down or catch it as it's already on its way back up.

 

So, in comparison a buy and hold investor decides that the market can't be predicted and takes market declines in stride and rides the market down. yet we all know that the market dow go through cycles and it also has long periods where the dividends end up being the only factor causing a real or "total market" return whereas the price index bounces around and ends up flat years later.

 

Some of the simplest (non-options based) dividend capture strategies require trading in and out of a position around the ex dividend date.  This limits one's time in the market. So you'd ride the market down but only basically, once a month (or quarter).

[undervalued]

Also related, I looked at Berkshire LEAPS really hard but decided against - too tied to the economy, maybe a little like BAC - maybe the common of both is better over the long-term...but of course the return on investment with the common will be far lower than with the LEAPS.

 

In a slow growth economy with central bankers manipulating the bond markets, unless there is a total blow-up in high yield, Valeant is much less tied to the economy, its business growth is very high and pretty independent of economic growth relative to Berkshire and BAC and GM.

 

Sorry for the stupid question, when you say LEAP, is that the same as buying call option for 2017?

[gfp]

Yes, LEAPS are the name of options with expirations further into the future like the 2017's.  Long term Equity AnticiPation Securities.

 

The best time to buy LEAPS on Berkshire is when it bumps against the 1.2x book value buyback threshold.  I've switched common to in-the-money LEAPS when this occurs a few different times (in IRA accounts) with very good results.  That one Christmas there were several of us on the board here doing it.  My in-laws found it rude to be working during the holidays but they made a lot of money on it...

 

Also related, I looked at Berkshire LEAPS really hard but decided against - too tied to the economy, maybe a little like BAC - maybe the common of both is better over the long-term...but of course the return on investment with the common will be far lower than with the LEAPS.

 

In a slow growth economy with central bankers manipulating the bond markets, unless there is a total blow-up in high yield, Valeant is much less tied to the economy, its business growth is very high and pretty independent of economic growth relative to Berkshire and BAC and GM.

 

Sorry for the stupid question, when you say LEAP, is that the same as buying call option for 2017?

[undervalued]

Yes, LEAPS are the name of options with expirations further into the future like the 2017's.  Long term Equity AnticiPation Securities.

 

The best time to buy LEAPS on Berkshire is when it bumps against the 1.2x book value buyback threshold.  I've switched common to in-the-money LEAPS when this occurs a few different times (in IRA accounts) with very good results.  That one Christmas there were several of us on the board here doing it.  My in-laws found it rude to be working during the holidays but they made a lot of money on it...

 

Also related, I looked at Berkshire LEAPS really hard but decided against - too tied to the economy, maybe a little like BAC - maybe the common of both is better over the long-term...but of course the return on investment with the common will be far lower than with the LEAPS.

 

In a slow growth economy with central bankers manipulating the bond markets, unless there is a total blow-up in high yield, Valeant is much less tied to the economy, its business growth is very high and pretty independent of economic growth relative to Berkshire and BAC and GM.

 

Sorry for the stupid question, when you say LEAP, is that the same as buying call option for 2017?

 

Isn't that pretty risky, switching between common to LEAPS (assuming it's a 100% conversion)? I imagine, if i hold 30% of BRK then switch all of them to LEAPS. If for some unknown reason, the market went south below the LEAP strike price, I would lose all of it. Where as if I just hold the common I will still make pretty decent amount.

[gfp]

It's definitely adding leverage so it is more risky than common.  Usually this is done with a portion of someone's BRK holdings.  By using deep in the money (how deep ITM you choose determines your leverage) LEAPS, and only doing the swap when BRK shares are bumping against the 1.2x BV buyback price, I believe it is an intelligent risk for some people.  Not recommending you end up like Rick Guerin on it though.

 

1.2x BV isn't a hard floor for BRK, and book value can decline as well of course - but Berkshire's retained earnings each quarter do a nice job of preventing major BV declines from stock market swings - and the stock portfolio becomes a smaller part of BRK each passing year.

 

A LEAP call that is 30-60 dollars in the money is much less risky than an at the money call - and there is usually next to zero premium on those options.

 

edit: Another thing I should mention is that you need to have the cash in an IRA, you can't just sell the BRK common and buy the options at the same time because options settle faster than common stock so the cash won't be available from a BRK sale for like 2 days to buy the options - it can be an agonizing wait if it isn't planned out because you could put on the sell BRK at 1.2x BV part and wait with no position while BRK quickly recovers 10% or something.  (hope that's clear)

 

 

Yes, LEAPS are the name of options with expirations further into the future like the 2017's.  Long term Equity AnticiPation Securities.

 

The best time to buy LEAPS on Berkshire is when it bumps against the 1.2x book value buyback threshold.  I've switched common to in-the-money LEAPS when this occurs a few different times (in IRA accounts) with very good results.  That one Christmas there were several of us on the board here doing it.  My in-laws found it rude to be working during the holidays but they made a lot of money on it...

 

Also related, I looked at Berkshire LEAPS really hard but decided against - too tied to the economy, maybe a little like BAC - maybe the common of both is better over the long-term...but of course the return on investment with the common will be far lower than with the LEAPS.

 

In a slow growth economy with central bankers manipulating the bond markets, unless there is a total blow-up in high yield, Valeant is much less tied to the economy, its business growth is very high and pretty independent of economic growth relative to Berkshire and BAC and GM.

 

Sorry for the stupid question, when you say LEAP, is that the same as buying call option for 2017?

 

Isn't that pretty risky, switching between common to LEAPS (assuming it's a 100% conversion)? I imagine, if i hold 30% of BRK then switch all of them to LEAPS. If for some unknown reason, the market went south below the LEAP strike price, I would lose all of it. Where as if I just hold the common I will still make pretty decent amount.

[CorpRaider]

That one Christmas there were several of us on the board here doing it.  My in-laws found it rude to be working during the holidays but they made a lot of money on it...

 

Making money and annoying the in-laws = awesome holiday gift to self...haha!

[tombgrt]

Another one to maybe consider (and maybe dismiss equally fast):

 

Buy a basket of low cost country etf's in markets with low valuations (preferable on ev/ebitda, ev/fcf, price/bv). Think Greece, Italy (did jump another 25% YTD...), South Korea, Russia, ...

 

pro:

- fight that home bias without concentrating too much in single ideas that make you uncomfortable;

- thus easier to stick with;

- relatively low effort & costs;

- likely outperformance over longer term versus buying a broad US index etf at current valuations;

 

con:

- why not go all the way and buy individual foreign securities? (answer for me: impossible to buy S. Korean stocks etc, only have access to a few;

- shorter term underperformance just as likely and ugly drawdowns from disasters etc are possible (but that goes for any market);

 

Imo it makes more sense to do this than buy large cap stocks with a 5-6% yield (if that). In today's world of low cost and highly diverse etf's, wouldn't it be possible to outperform in overheating home markets if you base your buying decisions on decent data? Does anyone know such a source that is updated frequently? Did anyone backtest this on a country basis? TIA.

[james22]

So if Berkshire isn't a good cash equivalent, no company is.

 

Hedged, Fairfax more so than Berkshire (if still not a good cash equivalent).

 

[innerscorecard]

Another one to maybe consider (and maybe dismiss equally fast):

 

Buy a basket of low cost country etf's in markets with low valuations (preferable on ev/ebitda, ev/fcf, price/bv). Think Greece, Italy (did jump another 25% YTD...), South Korea, Russia, ...

 

pro:

- fight that home bias without concentrating too much in single ideas that make you uncomfortable;

- thus easier to stick with;

- relatively low effort & costs;

- likely outperformance over longer term versus buying a broad US index etf at current valuations;

 

con:

- why not go all the way and buy individual foreign securities? (answer for me: impossible to buy S. Korean stocks etc, only have access to a few;

- shorter term underperformance just as likely and ugly drawdowns from disasters etc are possible (but that goes for any market);

 

Imo it makes more sense to do this than buy large cap stocks with a 5-6% yield (if that). In today's world of low cost and highly diverse etf's, wouldn't it be possible to outperform in overheating home markets if you base your buying decisions on decent data? Does anyone know such a source that is updated frequently? Did anyone backtest this on a country basis? TIA.

 

It's not impossible to buy South Korean stocks. You just have to go through the effort of either having a broker that can do it, or registered with a South Korean broker.

[no_free_lunch]

Another one to maybe consider (and maybe dismiss equally fast):

 

Buy a basket of low cost country etf's in markets with low valuations (preferable on ev/ebitda, ev/fcf, price/bv). Think Greece, Italy (did jump another 25% YTD...), South Korea, Russia, ...

 

pro:

- fight that home bias without concentrating too much in single ideas that make you uncomfortable;

- thus easier to stick with;

- relatively low effort & costs;

- likely outperformance over longer term versus buying a broad US index etf at current valuations;

 

con:

- why not go all the way and buy individual foreign securities? (answer for me: impossible to buy S. Korean stocks etc, only have access to a few;

- shorter term underperformance just as likely and ugly drawdowns from disasters etc are possible (but that goes for any market);

 

Imo it makes more sense to do this than buy large cap stocks with a 5-6% yield (if that). In today's world of low cost and highly diverse etf's, wouldn't it be possible to outperform in overheating home markets if you base your buying decisions on decent data? Does anyone know such a source that is updated frequently? Did anyone backtest this on a country basis? TIA.

 

I have thought about this quite a bit and made a sincere effort to implement it but ultimately haven't followed through.  Look at some of the research from Mebane Faber if you are looking for evidence of the effectiveness of the strategy.  Not sure though about a good source of data other than ishares and vanguard often give you the basic PE & P/B data on their site.  The problem I have had following through with this is you just have no idea what you are buying and some of the country etf's have small stock selection.  Also, is it reasonable to assume that all countries will have similar performances in their stock indices as the 6% post inflation we have seen in western countries?  A country such as Russia for example, has huge corruption so why would their stock market match that of a country without such a burden.  Even in countries without corruption and with good historical precedents there can be issues, if you look at EWG which tracks (sort of) the german DAX index it has materially underperformed the DAX since inception in '96, so almost 20 years of underperformance.  These types of issues, and many more I haven't articulated, make me question the strategy.  In the end I always come back to buying individual stocks. 

[maxthetrade]

Be careful, the DAX is a total return index, i.e. it assumes that dividends and proceeds from right offerings are reinvested.

[james22]

Q: I own shares of Berkshire Hathaway. Since some of the market value of Berkshire Hathaway is not equity, shouldn't I value this stock at less than 100% when calculating asset allocation? ...

 

A. ... "Berkshire Hathaway has about $27 billion of fixed-income holdings and another $15 billion in loans for a total of $42 billion in fixed income," says Horan. "Berkshire Hathaway has borrowed about $200 billion, however. So, their net fixed-income holdings are negative $158 billion. This levered position implies that investors should adjust their equity allocation upward, not downward."

 

In addition, Horan says Berkshire Hathaway has about $3.5 billion in derivative positions, including puts that he sold in 2008. "These derivative positions can be decomposed into equivalent amounts of equity and bonds to adjust the equity allocation upward further," says Horan.

 

In the absence of having the market value of operating company holdings, Horan said he would value Berkshire Hathaway as at least 100% equity, not less.

 

http://www.usatoday.com/story/money/markets/2015/07/17/berkshire-hathaway-asset-allocation-warren-buffett/29620473/

[Haasje]

Let's say your stock portfolio is equivalent to 7X.

 

You are a microcap specialist but can only find 5X of opportunities.

 

I think it could be better as opposed to holding cash in terms of your RoI over the long haul to put the other 2X in mega caps even if you knew for sure you had no edge there.

 

There are likely better alternatives though in such a situation. 

 

I guess if you were a really good microcap investor it would be better to hold cash instead. There is probably some kind of expected return number between 10%-20% where holding cash becomes better. The more skilled you are the better it will be to have cash > no edge mega caps.