How Much Cash Are You Holding?

[Viking]

I have been getting more defensive recently. I am up to 30% cash and likely will increase this to 40% soon. The remainder is in equities.

 

Buffett’s first rule of investing is ‘Don’t lose what you have’. His second rule is ‘Don’t forget the first rule’.

 

I continue to think interest rates are the key. If they continue to increase (and the Fed continues to tighten) then stocks will perform poorly. The Fed announcement in December and what they say will be very important to how stocks perform in the near term. Longer term, i see storm clouds. So i am happy to build cash until i get a better handle on the big picture. If i miss some upside i am ok with that. Capital preservation is much more important for me.

[SHDL]

I probably have somewhere around 20% of my investment portfolio in cash.  And a good chunk of the remaining 80% is hedged.

 

I wrote a bit here (http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/is-it-too-early-to-call-an-economic-top/msg349035/#msg349035) explaining why I’m not too bullish on US equities in general at this time.  Prices have come down a bit but obviously not enough to improve my outlook in a major way.  Plus, the macroeconomic picture is pretty murky, with few historical data points that provide meaningful empirical insight on how events might unfold from here.

 

That being said, if I find what I think is a great investment tomorrow I am happy to put the cash in my investment portfolio to work.  So the 20% I mentioned above may well be down to 0% in a matter of weeks or months.  In this sense I see it as a temporary thing.

 

One hard rule that I stick to very carefully however is to make sure I have at all times what I call a “buffer” — a separate portfolio consisting of cash, government bonds, and other low risk assets that’s large enough to cover my most basic spending needs for 10+ years.  This way I know that I will at least not die — and have plenty of time and capital to recover — even if my investment portfolio gets completely wiped out and I lose all other sources of income. 

[WneverLOSE]

I had 10% cash heading into this relentless selloff, timing the market is not my thing I guess.

 

The way I think about it is if stocks don't drop too much I made a good decision staying, if they drop by 50% more that 10% will buy me as much as 25% cash would buy me just a few months ago.

 

about 70% of my net worth (which is concentrated among 5 holdings) are potential massive acquirers of stock (have good balance sheets, are cheap and indicated they are going to buy a lot of stock).

 

This makes it a flow through dollar cost average for me.

 

The real dumb thing is that for years I was really worried about the future returns of every investment I considered so for most of that time I had about 50% of my net worth in cash and "uncorrelated investments" (Arbitrage).

 

Just a few months before the current selloff started I found a stock I thought was cheap enough and made it a 30% of my portfolio, I wish I have waited and bought it for a 30% discount current buyers get... :'(

 

heck, if stocks drop 50% more the current plan is to put that 10% into the longest call options I can find on my holdings and go big or go home. 8)

[james22]

Near 40%! :) But have been for some time... :(

 

I'll only better those who've been more fully invested the last several years if the market falls significantly and I don't buy prematurely.

 

Like WneverLOSE, I'm also hoping most of my holdings prove anti-fragile.

 

 

 

 

[rolling]

If I take into account taxes to be paid next year, I still hold negative cash:

- I don't expect a global crisis/recession

- I don't time the market

- my holdings seem cheap

- my holdings seem to be in good financial shape and have low leverage (look through finantial leverage might be negative)

- it is likely there are cheaper stocks out there

- savings and expected dividends on current holdings are expected to be enough to pay taxes and all expenses (ordinary and extraordinary)

- this drawdowns eventually reverse, as long as the underlying businesses do well

[Cigarbutt]

If I take into account taxes to be paid next year, I still hold negative cash:

- I don't expect a global crisis/recession

- I don't time the market

- my holdings seem cheap

- my holdings seem to be in good financial shape and have low leverage (look through finantial leverage might be negative)

- it is likely there are cheaper stocks out there

- savings and expected dividends on current holdings are expected to be enough to pay taxes and all expenses (ordinary and extraordinary)

- this drawdowns eventually reverse, as long as the underlying businesses do well

Thank you. This is a nice checklist. As if one is ready to hold for 10, 20 years or longer.

Question:

What's your definition of look-through financial leverage?

Do you mean?

-net debt (total debt - "excess" cash)

-debt net of untapped dividend potential from subs

-debt net of potential sale of valuable but non-core assets that would maintain value under various scenarios

-debt net of cash that could rapidly be freed from working capital due to efficient scale down of operations with various downturn scenarios

[thepupil]

My various retirement accounts (~50% of NW) are 100% long.

 

My taxable account (2/3 of taxable)  is -74% cash. This account is 30% long unhedged value equities and about 130% long Berkshire hedged with $170/share 2020 puts. With the value of the puts it’s about a 22% of equity maximum loss for the Berkshire position.

 

My other taxable account (1/3 of taxable) is 100% long and unlevered..

 

Margin borrowing pays living expenses, 100% of paycheck buys stocks, bonuses de-lever when needed.

 

 

[no_free_lunch]

Went from 20% cash in summer to about 15% today.  With the price drops it works out that I deployed about a third of my cash so far. 

 

I would need a significant price drop to deploy further.  The US market isn't that cheap, I call it upper end of reasonable.  Foreign equities are cheap but I already have a large allocation there, mostly through etfs.

[rolling]

If I take into account taxes to be paid next year, I still hold negative cash:

- I don't expect a global crisis/recession

- I don't time the market

- my holdings seem cheap

- my holdings seem to be in good financial shape and have low leverage (look through finantial leverage might be negative)

- it is likely there are cheaper stocks out there

- savings and expected dividends on current holdings are expected to be enough to pay taxes and all expenses (ordinary and extraordinary)

- this drawdowns eventually reverse, as long as the underlying businesses do well

Thank you. This is a nice checklist. As if one is ready to hold for 10, 20 years or longer.

Question:

What's your definition of look-through financial leverage?

Do you mean?

-net debt (total debt - "excess" cash)

-debt net of untapped dividend potential from subs

-debt net of potential sale of valuable but non-core assets that would maintain value under various scenarios

-debt net of cash that could rapidly be freed from working capital due to efficient scale down of operations with various downturn scenarios

I am not that sophisticated, sorry. This things run in my head in a disorganized way. I usually adapt my framework to each company as I deem necessary, and my definition of finantial leverage isvariable. In current case I was thinking in excess cash less debt except for financial arm debt and except for non recourse debt. Then I run the look through to me and realize My slightly negative cash position is actually positive. This things help me when stocks crash (i lost some money in brexit day and don’t Wish to repeat the reptile behaviour)

[Cigarbutt]

...This things run in my head in a disorganized way. I usually adapt my framework to each company as I deem necessary, and my definition of finantial leverage isvariable. In current case I was thinking in excess cash less debt except for financial arm debt and except for non recourse debt. Then I run the look through to me and realize My slightly negative cash position is actually positive. This things help me when stocks crash (i lost some money in brexit day and don’t Wish to repeat the reptile behaviour)

Thanks for the feedback on the personal look-through. In my humble experience, people who report thinking in a disorganized way often have strong ability for independent thought which is a relatively rare quality. I’m halfway through the Wal-Mart story and the founder, Sam Walton wrote: “Being organized would really slow me done. In fact, it would probably render me helpless”. :)

 

Just to link with the spirit of the thread, it looks like holding cash (3-mo US treasury bills) for 2018 will be superior to holding long-term bonds (10-yr US Treasuries) AND the S&P index which is a rare occurrence (13% of the times since 1928). Exceptionally this year, it looks like cash will be the only asset class of the three to have a positive return (last time 1969).

 

But, in general, holding cash is typically a losing proposition. This statement is even more significant for longer holding periods. Food for thought when deciding where to stand in the fragile, robust and anti-fragile spectrum.

 

Good luck with your small and micro-cap investments.

 

I think racemize has produced and shared great work on this but here’s a reference to a short link that will likely have a different title next year:

https://pensionpartners.com/cash-is-king/