100% Cash, Ready for the Crash

[wachtwoord]

I also will note that Berkshire doesn't do macro.  Maybe a little bit with their cash hoarding but they primary stay fully invested.

 

Fairfax does do macro and look how well that has turned out.

 

So are we really smarter than Berkshire and Fairfax?

 

I'm hoarding cash until valuations are more attractive.

 

How is that different from Berkshire?

 

Cash is a relatively limited part of their total business.

[james22]

My point: they are *not* fully invested.

 

 

Is waiting for a fat pitch now considered market timing?

[Mephistopheles]

They also have very limited opportunities

[james22]

Post a market correction, they'll have more.

[rb]

Cash is a relatively limited part of their total business.

Their cash is now around 85 billion. That's 31% of their book value. Certainly doesn't seem limited.

[Mephistopheles]

Post a market correction, they'll have more.

 

Of course; but if an elephant that fits their metrics offers to sell itself to them tomorrow for $50 billion, they aren't going to wait for a market correction. Or if the Fed approves an increase in WFC stake, for example.

[KinAlberta]

A good read:

 

 

Jeremy Grantham Still Doesn’t See a Bubble

Instead, the veteran money manager is predicting low single-digit returns for stocks in U.S. and abroad.

 

By JEREMY GRANTHAM

Nov. 8, 2016 1:41 p.m. ET

 

"Rather like a parrot, I have been repeating for 10 quarters now my belief that we would not have a traditional bubble burst in the U.S. equity market until we had reached at least 2300 on the Standard & Poor’s 500, the threshold level of major bubbles in the past, and at least until we had reached the election. ..."

 

http://www.barrons.com/articles/jeremy-grantham-still-doesnt-see-a-bubble-1478630474

[undervalued]

I think it's okay to be in 100% cash. I think I read someone said Cash doesn't blow up. it's the stock in the portfolio that you have to worry about.

 

I think staying cash and waiting for the right opportunity.. Now that's the hard part.

[CorpRaider]

To me, the hard part is remembering to focus on real returns.

[james22]

I think it's okay to be in 100% cash. I think I read someone said Cash doesn't blow up. it's the stock in the portfolio that you have to worry about.

 

I think staying cash and waiting for the right opportunity.. Now that's the hard part.

 

Opportunity cost is a real thing.

 

(Though if the low single-digit return scenario plays out, the opportunity cost of cash is likewise low.)

[Uccmal]

Grantham seems to use a 10 year forward rolling target.  He has never stated there wont be short brutal corrections, or bear markets, along the way with your single digit returns.  There will be buying opportunities sometime.  Do you see any long flat sections on the linked chart:

 

http://www.macrotrends.net/2324/sp-500-historical-chart-data

 

I dont believe for a second that we are going to have years of slow moving increaes in the market.  The real workd is far more dramatic.  We just dont know what event is going to take them down. 

 

[undervalued]

I guess for those who are in cash in a way they are betting market will go down and get in time to buy back in before it goes up again. This is why I will miss Buffett he is such a good market timer.

[Uccmal]

I guess for those who are in cash in a way they are betting market will go down and get in time to buy back in before it goes up again. This is why I will miss Buffett he is such a good market timer.

 

Yes, he is one of the best at market timing.  Through his entire career he has built cash in rising/high markets, and put it to work in low markets.  Over and over. 

 

[rb]

I guess for those who are in cash in a way they are betting market will go down and get in time to buy back in before it goes up again. This is why I will miss Buffett he is such a good market timer.

 

Yes, he is one of the best at market timing.  Through his entire career he has built cash in rising/high markets, and put it to work in low markets.  Over and over.

Buying when things are cheap and sitting on your hands when they're expensive tends to make you a good market timer. The second part is the hardest.

[scorpioncapital]

To turn the headline of this thread on its head: 100% Stocks, Ready for the Crash.

Has anyone heard of a crack-up boom? This is where things go up but inflation goes up even more, but you have to own things to even have a chance of keeping up since cash will be decimated.

[undervalued]

To turn the headline of this thread on its head: 100% Stocks, Ready for the Crash.

Has anyone heard of a crack-up boom? This is where things go up but inflation goes up even more, but you have to own things to even have a chance of keeping up since cash will be decimated.

 

Didn't we have this in 80s and FED raised interest rates way up? For those in cash, could've earn high yield with risk free instruments? Don't get me wrong, feeling left behind when market keeps going up is a real pressure when you're 100% cash. That's why it's so hard to do nothing. It's hard to be 100% cash and not doing stupid things.

[thepupil]

To turn the headline of this thread on its head: 100% Stocks, Ready for the Crash.

Has anyone heard of a crack-up boom? This is where things go up but inflation goes up even more, but you have to own things to even have a chance of keeping up since cash will be decimated.

 

http://www.cnbc.com/2013/12/31/here-it-isthe-worlds-top-performing-index-in-2013.html

 

FWIW, I own a mix of businesses, real assets (each in stock form), bonds, treasuries, gold, silver, and my labor. Because I don't know what will happen. It's been said before but, ff you are super bearish just hedge the tail. The cost of not participating in any upside is potentially much greater than blowing a couple 100 bps on hedge or cash drag or whatever.

 

 

[no_free_lunch]

Another, risky alternative is to go 98% cash but put 2% into OTM calls.  I will let you decide whether to do this on an index level or on specific companies but this will hedge against the very real RISK that people have identified of a stock melt up.

[Tim Eriksen]

I guess for those who are in cash in a way they are betting market will go down and get in time to buy back in before it goes up again. This is why I will miss Buffett he is such a good market timer.

 

Yes, he is one of the best at market timing.  Through his entire career he has built cash in rising/high markets, and put it to work in low markets.  Over and over.

 

If you think Buffett is a market timer, then you really do not understand Buffett.  Buying at attractive prices is not market timing. 

[Jurgis]

It's been said before but, ff you are super bearish just hedge the tail. The cost of not participating in any upside is potentially much greater than blowing a couple 100 bps on hedge or cash drag or whatever.

 

Can you remind how you would hedge the tail for couple 100bps? ( I assume perma hedge, not something for 2-3 months ).

 

Edit: I assume "couple 100bps" per year. And "couple" is less than 3. ;) So <3% per year. ;) But feel free to suggest something more (or less) costly.

 

Serious question, though mostly out of intellectual curiosity.

 

Thanks

[undervalued]

I guess for those who are in cash in a way they are betting market will go down and get in time to buy back in before it goes up again. This is why I will miss Buffett he is such a good market timer.

 

Yes, he is one of the best at market timing.  Through his entire career he has built cash in rising/high markets, and put it to work in low markets.  Over and over.

 

If you think Buffett is a market timer, then you really do not understand Buffett.  Buying at attractive prices is not market timing.

 

Well he is buying it from a market, and when attractive prices arises, that's a good timing as in time to buy alas Market Timing. Let's invert and say if you're not a market timer, you would blindly purchase at constant intervals.

[thepupil]

It's been said before but, ff you are super bearish just hedge the tail. The cost of not participating in any upside is potentially much greater than blowing a couple 100 bps on hedge or cash drag or whatever.

 

Can you remind how you would hedge the tail for couple 100bps? ( I assume perma hedge, not something for 2-3 months ).

 

Edit: I assume "couple 100bps" per year. And "couple" is less than 3. ;) So <3% per year. ;) But feel free to suggest something more (or less) costly.

 

Serious question, though mostly out of intellectual curiosity.

 

Thanks

 

Rough calculations below. You more or less answered your own question, but I appreciate it because it made me confirm the numbers.

 

Jan 2019 puts 20% OTM

 

BRK            2% / year (premium / market value (not the actual value insured) / 2 years)

GOOG      2.9% / year

SPY          2.2% / year  US Large

JNK          2.2% / year  Junk bonds

VWO        3.5% / year  EM

VGK        2.2% / year  Europe (Jan 2018)

 

Less so after tax if you have other positions and realized gains (and the put expires worthless).

 

If you are worried, just buy insurance and bear the risk of a 20% drawdown. That way your downside (-24%) and underperformance (2% a year) are relatively bounded and you're not going to permanently impair the growth of your wealth and accidentally sit out the market for a decade.

 

200 bps of underperformance will obviously cost you a ton  over time, but making 6% versus 10% or 14% versus 18% over a 2 year period is a lot less scary than making 0% versus 100% (upside tail) and you can sleep at night knowing that if the market loses 60% because Europe blows up, you'll be sitting pretty and only down 24%.

 

Just my opinion, could be wrong. Just think that bounding underperformance and downside has merit, particularly if one is starting to predict crashed and being tempted to hold 100% cash. But lots of other people already said that.

 

In short, consider the 1930's, but don't forget the 1990's. http://www.wsj.com/articles/SB876952178231654000

 

 

 

[Uccmal]

I guess for those who are in cash in a way they are betting market will go down and get in time to buy back in before it goes up again. This is why I will miss Buffett he is such a good market timer.

 

Yes, he is one of the best at market timing.  Through his entire career he has built cash in rising/high markets, and put it to work in low markets.  Over and over.

 

If you think Buffett is a market timer, then you really do not understand Buffett.  Buying at attractive prices is not market timing.

 

oh, I understand Buffett plenty.  Its all semantics.  He is a market timer.  He tells lay persons not to do it, but he has done it repeatedly.  You can call it what you want.  I calling selling all your stocks near market tops market timing.  He is damn good at it. 

[Jurgis]

Jan 2019 puts 20% OTM

 

Thanks

[Ballinvarosig Investors]

I guess for those who are in cash in a way they are betting market will go down and get in time to buy back in before it goes up again. This is why I will miss Buffett he is such a good market timer.

 

Yes, he is one of the best at market timing.  Through his entire career he has built cash in rising/high markets, and put it to work in low markets.  Over and over.

 

If you think Buffett is a market timer, then you really do not understand Buffett.  Buying at attractive prices is not market timing.

In 1969 he liquidated the entire BPL partnership prior to the market tanking. That was a clear act of market timing. Less clear, but you could argue that the huge cash positions that Berkshire held in 1987 (Berkshire didn't buy a single equity from 1984 to 1987) and 1999 was Berkshire at very least hedging their bets, maybe timing a little. Just look at the huge cash position that Berkshire holds now, is that not a degree of market timing? To say it isn't, well that circle is very hard to square in the context of what Buffett says. I've seen Buffett asked recently, is the market expensive? He said no (as he has said on occasions before that). If the market is not expensive, and he also says you should buy great businesses at fair prices, why is he risking massive opportunity cost in holding so much cash?

 

I agree with Uccmal. Warren is now an elder statesman of the stock market. When he speaks, people listen. I think he knows this, and that's why he is so cagey in what he says these days. I think while he is happy to engage in market timing, I don't think he wants to flat out go and tell people he does because you'd have people trying to emulate him, and that would be disastrous. The statistics are pretty clear on this, when 95% of people try to time markets, they get it badly wrong and lose LOTS of money. So I think when Buffett says just buy the great companies, and to not sweat on the price too much, he sees that as good advice for the general public, but not necessarily something he follows himself.