Too much risk, lessons not learned

[Hawks]

I don't post much, but this Board has so many astute, insightful members that it is enlightening to read all the postings many times each day. I could name "my favourite", but I will not go there because this Board is made up of ALL that post, with their agree/disagree comments but they are always respectively. Thanks to Parsad for all that he has done to create and inspire such an informative, insightful group of individuals willing to share in an intelligent, thoughtful manner. And to be respectful of one another.

 

One post some time ago I did was "Why is everyone so negative?" Some of you long time members may remember that. It brought a tremendous number of responses, which truly amazed me, and kept me waiting for the next response and then the next. I learned a great deal from those responses such that my retirement investments/savings are in excellent shape and better than ever before 2008/2009. I know there are many people in this world who cannot say the same, but I am truly thankful for the member postings here.

 

So, here is my question this time. Has anyone learned the lessons of 2008/2009?

 

Right now, commodities are all the rage (as Buffett said,you are hoping the next guy will pay more than you just did (paraphrased), individuals are trying to chase the markets having missed the greatest run-up in the NYSE and TSE in decades, risk is back big time, and Klarman is warning us all as well. But Buffett seems ok with America recovering, but slowly which does sound good. But I am not sure that this is  "we have seen this before" and that this is a normal, but slower recovery. And that America and the world is OK.

 

I was invested 90-95% in stocks up until 2 weeks ago, and fighting back from terrible losses in 2008/2009 (when I lost 30-40%). But, back then, I did go back into the market at the depth of the markets, with all the great values that were being offered (I remembered what Templeton did when he bought hundreds of stocks during the Depression, which sent him on his way to becoming an all-time great investor which he carried over for the rest of his life), and so now, I am in the "green" and wanting to stay there.

 

And as of today, I am now 98-99% cash.

 

So, again my question: Have we learned the lessons of 2008/2009 and the Crash?

[ERICOPOLY]

What percentage is Klarman holding in cash?  I want to know to what degree he is walking his talk.

 

[FFHWatcher]

History repeats itself and no one learns.  More importantly, I want to know what you own.  What is your 1-2% equity position?

 

If you do still like some stocks but don't want to hold because of the market risk, have you considered hedging the 'market risk'?  ie. 25% in your favourite stocks, 25% short the <insert various market indexes here> and keep the other 50% in cash?  Can you be any more pessimistic and 98-99% certain that your decision to hold cash is right?  How can anybody be that sure about anything?

[Partner24]

Yes and no.

 

It's a case by case situation. I don't take a look at the overall market to determine what I will do with my individual stocks.

 

Take a look at some big companies like Walmart and the like. Do they sound that much expensive? Not to me! Some P&C insurers neither.

 

If my strategy was to invest in indexes, that would be a different story.

 

Regarding your question, I don't think that people learn that much. My father has played golf since the last 5 decades and businessmen sometimes talk about their investments strategies on the golf field. Two years ago, everybody was talking about government bonds, now they talk about oil. If they would have talked about oil or stocks 2 years ago and government bonds now, I would have answered "yes" to your question.

 

"Be fearful when others are greedy. Be greedy when others are fearful". 12 words that cost nothing but are worth a lot of money.

 

Cheers!

 

 

[farnamstreet]

Seth Klarman wrote about the lessons not learned in his 2009 letter. For those interested, you can find that here.

[beerbaron]

Well, I don't know much about where the market will go in the next few years but I have reasons for concern when I look at the latest 13-F from Klarman, Einhorn, Watsa and Buffett almost no shares have been bough by the 4.

 

As for risk, we are not out of the woods yet. Invest with caution.

 

BeerBaron

[zippy1]

I am currently about 25% cash for investable part of networth and I am not sure I would feel comfortable to go to 100% cash.

 

Several reasons,

1. the purchasing power of cash appears to be going down fairly quickly.  If the market dont' crash and I am holding cash, I will see my purchasing power going down.

2. I can't time the decline.

3. there are still some bargains in the market such as P&C insurance companies.

4. other stocks that I own are at reasonably valuation but not crazy valuation. ( Ok, I admit I still hold a few share of Contango spinoff thing, but we are talking about a couple hundred dollars.) If they reach my sale targets, I will sell.

5. Even if I took a 30% correction and never bounce back, it would mean that I have to work 3-4 extra years.  It is not the end of world.

6. I lost ~10% in 2008 and made 50% in 2009, thanks to this board, with a big chunk of portfolio in Fairfax. I was not and am not owning the index. 

 

best regards,

 

Zippy

 

 

[alertmeipp]

I have learned that the govs will bail people out and move the debt from private to public. They will spend/print cash until rating agencies say they are junk.

We have learned, ppl are saving more than they were - but the saver is helping the bailout in that their interest rate is near 0.

Some corps have taken the chance to fix their balance sheets - building up cash, cutting expenses.

We have learned about QE - making money out of thin area.

 

Is the market in general pricey - yes.

Is oil pricey - humm... i don't know - in relatively to what? Is USD pricey?

 

With all those CASH printed around the world, is holding cash the best... I just don't know.

 

 

[augustabound]

....when I look at the latest 13-F from Klarman, Einhorn, Watsa and Buffett almost no shares have been bough by the 4.

 

That's a good point.  We watch these guys to see what they buy and when they seem to be sitting in cash as signs.  But we don't usually talk about what they don't do as in when they're not buying.

[Myth465]

I think those above 50% cash are fighting the last war. The markets are expensive and I am looking to raise cash from my 96% in equity, but I want maybe 10% - 20% cash. Everyone of my holdings minus ESV is still fairly cheap though.

 

I dont see where you are getting too much risk. People seem to be doing the prudent thing. Not everyone can hold treasuries at 1% indefinitely waiting for the next big crash. Joe Six pack is starting to join the party, but isnt he always a johnny come lately. Markets should trade around their intrinsic value, but they often overshoot. Perhaps 7k was too low and 16k is too high but.....

 

I suggest devoting energy to finding cheap companies instead of trying to call the next top or fight the last war. I guess the music is still playing and I am enjoying the dance. My port has doubled in the last 6 months while all the market timers were trying to time the market. Things however are a bit frothy, and I am updating my calculations and hopefully will be taking profits soon.

[hyten1]

I think just because th 4 didn't buy anything doesn't mean there is no value around. They have much different needs and criteria (big elephants) than we do (I suspect).

 

Also buffett has also said cash is the worst investment

 

For me I am cautious, I then to look at individual company/stock more than macro

 

fyi, i am 30% cash right now, waiting for the next good pitch

[stahleyp]

a few weeks ago Munger stated something to the effect of "i've never seen so many intelligent people hold so much cash."

 

A bunch of the all star managers are not bullish. With that being said, they are also wrong (at least over the short term). Klarman was bearish from like 1992 or so on. His fund was dominated by the S&P 500 for years and years. Buffett was wrong back in 1998 about technology stocks (for a while) and derivatives in 2002.

 

I admire Buffett more than just about anyone else in the world, seriously. But, he is not perfect...although more so that I'll eve be! I think back in 2007 he even said the subprime market was not big enough to derail the economy.  That was the one time I really, really wish I didn't listen to him, but I did.

 

http://www.reuters.com/article/2007/05/05/us-berkshire-subprime-idUSN0542541620070505

 

I guess the point is that incredibly hard to time things...even if you're right!

[stahleyp]

 

 

My port has doubled in the last 6 months while all the market timers were trying to time the market. Things however are a bit frothy, and I am updating my calculations and hopefully will be taking profits soon.

 

myth, does that include additional contributions or is that only investment related returns?

[Myth465]

Only investments. I have not added to my portfolio in over a year (outside of 401k additions which go into a large cap value fund). Most of the gains were fueled by ATSG, ATPG, ESV, DO, SD, FBK, and ROIC. I still think many of these are cheap, and am considering selling FBK to raise 10% cash which should make it easier to sleep. I really like my holdings and want to convert most of my leaps into shares for the long haul.

 

Commodity rally has helped, but most of these were dirt cheap on $75 oil. I think Parsad said it best, by cheap sell dear. Buffett can only buy large caps at $20-$50 billion. He also prefers private businesses and has cash requirements. Following his moves unless you too have billions seems a bit foolish inmo.

 

As I said things are frothy, cash is nice. On a 10%-15% pullback you can reload. It seems like everyone though wants cash for cash sake and I doubt those with 90% cash will buy on a 10%-20% pullback. I believe they want Feb March 2009 type prices. It may be a long wait. Also someone said if the market goes up 7%-8%, and then we get our 10% pullback you arent much better off. I say hold cash if you cant find anything.

 

But I dont see anyone looking. Everyone is looking at GMOs 7 year valuation / or Schillers valuation and saying the market is above IV. 1. Well it could stay above IV for years, and probably should overshoot given the dramatic 2008 fall and 2, you arent buying the market (I hope).

 

With all this talk about Buffett he still holds billions in equity and so does pretty much everyone else.

 

----

 

My pea shooter is empty. I am looking to find some bullets.

Many dont realize that the point of having a loaded gun (whether pea shooter or elephant) is to actually shoot the damn thing.

[stahleyp]

myth, if you ever decide to manage money professionally, let me in... please. :)

[rmitz]

I agree with Myth, but it's true that if you're older you have different requirements, and might want to be slightly more conservative.  Personally, I feel comfortable just not being leveraged like I was the last time (I learned my lesson then).  If things go down 30% from here, I won't be sweating. I won't necessarily have as many bullets as the people with all the cash, but I'm comfortable with that too.  My cash position will be dictated by my ownership stakes coming close to full value and whether or not I can find places to put the money.  I may lean a bit more towards arbitrage situations, but I think that's about it.

[Hawks]

Have enjoyed reading your responses to my post. To reply to some comments:

 

Partner24: you quoted "Be fearful when others are greedy, etc etc.". I agree. And that is exactly what I said a few years ago on this Board when I posted "Why is everyone so negative?" And I followed my own advice at the time and was able to buy some wonderful, cheap equities such that I climbed back from my losses during the "crash" and am now well ahead of where I was during the peak of 2007-2008. So, by going to cash now, all I am saying is that it really concerns me that so many (like the media, govts, fund managers, etc) are now so enthusiastic and giddy and bidding prices up as if all problems have been solved. I am simply trying to be prudent, take my profits (and willing to leave some on the table if that is what happens) and protect what I have. But I can still dabble here and there, and that is what I will do, but cautiously now.

 

FFHWatcher: you said "How can anybody be that sure about anything?". Hey, I am not all that sure that I am right. And I am certainly not preaching or teaching or calling a "market top" or anything like that. I am a simple man, content with what I have achieved with my retirement portfolio (when others were "throwing in the towel" and they are still now wondering how they will ever recover their lost savings). I've been retired some 5 years now, and there are times to be prudent and more cautious. The "stock market rocketship" took off some 12-18 months ago and I have enjoyed the ride. I don't mind getting out early if that is what the future holds. But I sure don't want to be the "last man in" still trying to catch that rocket. And with all that money flowing out of bonds and into equities, mutual funds, commodites, etc., it sure looks like everyone wants in!  And you know, I can still dabble here and there; I haven't tied my hands behind my back so that I can't punch the "buy" button!

Re: "the 1-2% equity stake" which I currently have. I have a small position in BIN on TSX (I'm Canadian, eh?). They are a waste and garbage collector in North America. And for sure, there's a lot of garbage out there in our society ready to be collected! I like their growth story so far, seems like smart management, and doing "tuck ins" here and there. Have a little of Radio Shack as has been discussed on this Board recently. It gets my attention when so many hate a stock and don't want to touch it. So I do some research and if it doesn't smell too bad, I load up my small peashooter (thanks Myth for that analogy) and shoot it. Also have some U on TSX. It is pure uranium (not mining stocks). Demand is growing for this fuel due to current nuclear plants but more so due to the large number of new plants coming on stream these next few years. And uranium has a long way to go to get even close to its high some years ago.

 

Zippy1: you said in #2 in your list that "I can't time the decline". I agree with you. Is there anybody out there who can??  But I'm not trying to time anything. As I said earlier, I am getting more and more cautious with all the gains I have made. I will still buy here and there, but I'm not going in 90-100% again for some time (when: who knows?). You know, all those big problems out there have not gone away. There is the European debt problem, the state and municipal deficits and debts, the spiralling food prices causing revolts and hardship and starvation, etc. I want to have plenty of cash around when and if the market stumbles for whatever reason.

 

Beerbaron: you wrote "invest with caution". I totally agree, as previously stated. "Blood is not running in the streets" like in 2008/2009 (unless you happen to be in the Middle East). Heck, even Buffett has been sitting on billions for the last 6 months or so, and not doing much buying as the "rocketship" goes higher and higher. And yes, I know, "he has loaded his elephant gun and his trigger finger is getting itchy". But there is only one Buffett.

 

Myth465: you said "I suggest devoting energy to finding cheap companies". Absolutely agree. I love to do that. But I am finding it more and more difficult to find those these days. It was "like shooting fish in a barrel" in 2008/2009 but it took guts to buy when everyone was selling. Look what Parsad said about Wells Fargo back then, and a lot of people were skeptical but he was right on. So if any of you are finding those "cheap companies", be sure to post them. I will be your most avid reader. And I have cash to put to work! Cheers.

 

[zippy1]

Have enjoyed reading your responses to my post. To reply to some comments:

 

Zippy1: you said in #2 in your list that "I can't time the decline". I agree with you. Is there anybody out there who can??  But I'm not trying to time anything. As I said earlier, I am getting more and more cautious with all the gains I have made. I will still buy here and there, but I'm not going in 90-100% again for some time (when: who knows?). You know, all those big problems out there have not gone away. There is the European debt problem, the state and municipal deficits and debts, the spiralling food prices causing revolts and hardship and starvation, etc. I want to have plenty of cash around when and if the market stumbles for whatever reason.

Hawk: I guess our opinions are not so different as I also have some cash (25%) that I did not deploy right now. The idea like you say is that if the market stumbles, one would like to be able to take advantage of the market decline.

 

However, the return on cash is low. The policy response by goverments for the European debt problem, the state and municipal deficit and debts that you cited likely are to print more money. That further dilutes the purchasing power of cash. As we wait for these issues to be resolved (and the market decline), the cash's purchasing power is going down. This is actually reflected in the spiralling food price that you mentioned.

 

Personally, I am willing to hold some cash but I am not comfortable to hold a large amount of cash.  I prefer to hold undervalued securities/businesses if I can find them.

 

Also, everyone's risk tolerance is different depending on factors such as age, income, spending, financial obligation to children/parents....

 

I can see why someone want to hold a large percentage of cash in their portfolio.

 

 

[Hawks]

Zippy1

I too prefer to hold undervalued securities as you said. I'm just having far more difficulty finding them in 2011. When I look at the 5 and 10 year charts of hundreds of companies which I research, most are at or very near their highs.  If I were a "momentum" guy, I guess the thing to do would be to keep riding the wave as long as it wants go. But I'm averse to that way of thinking, unless of course I have found a "dog that can hunt" before the market does, and then I will ride it up for sure. Thanks for your reply.

[Myth465]

Zippy1

I too prefer to hold undervalued securities as you said. I'm just having far more difficulty finding them in 2011. When I look at the 5 and 10 year charts of hundreds of companies which I research, most are at or very near their highs.  If I were a "momentum" guy, I guess the thing to do would be to keep riding the wave as long as it wants go. But I'm averse to that way of thinking, unless of course I have found a "dog that can hunt" before the market does, and then I will ride it up for sure. Thanks for your reply.

 

INMO you arent investing you are anchoring. Which I do as well. The question is not whether they are at the tops of their ranges or 52 week high. Its what are they worth vs. where they are trading. I see value in WDC and a few other holdings,  but havent been looking. Work has been kicking my ass and I am simply trying to stay up to speed on what I own. I think there is much less value out there, but there is value. You have P&C which is at lows and some banking. Banking I dont get, but many are looking at insurers.

 

myth, if you ever decide to manage money professionally, let me in... please. :)

 

Lol you will be the first one I call. I am hoping after the recovery to move from Accounting to Finance.  Right now everyone looks like a genius so I am trying to stay centered and protect my seed capital. It does feel like everything is finally coming together though.

[SharperDingaan]

Keep in mind that you read only what the press believes will sell in its local market. Those in Europe & Asia are not so sanguine.

 

- The Wisconsin union rallies are only the beginning. They would not be occurring unless those states really were in trouble & cannot pay their bills. Politicians are not in the business of alienating large voting blocks..

- The North-African (& Arabian) regime changes are being driven by inflating food prices & high unemployment. The same thing is occurring in India, China, & Brazil – their poor just aren’t rioting yet because they have more hope.

- The new IFRS reporting is going to disrupt Q1 reporting. For those with P&E - the headline is not going to be the strong Q1 earnings, it will be opening (& often materially negative) adjustment to retained earnings.

- We know that the Saudi oil production has likely peaked (Wikipedia leaks), & that there is significant dissidence in Saudi (Bin-laden is actually Saudi). When oil is at 140+/barrel, most of the global economies are going to experience some pain.

- Why buy now, when the goods may well be on sale within 3-6 months? 

 

SD

 

[Myth465]

Keep in mind that you read only what the press believes will sell in its local market. Those in Europe & Asia are not so sanguine.

 

- The Wisconsin union rallies are only the beginning. They would not be occurring unless those states really were in trouble & cannot pay their bills. Politicians are not in the business of alienating large voting blocks..

 

 

SD I think you are dead wrong no Wisconsin. Its all just a political agenda and has nothing to do with budgets.

 

I agree with you on most of the rest. Also what large companies / industries are switching to IFRS? Its not too popular in my field (Energy / Oil Field Services). I think the energy rally will cruse the economy. I like the thesis of rolling energy based recessions or at least slow downs . I just filled up and noticed on my cc tracker that it costs $45. Caused me to do a double take. Was used to $30. My oil and gas portfolio has made up for that, but it will be painful for Joe Six pack when that filters into food and other prices. Its already hit gas prices.

[Hawks]

SD

I'm thinking along the same line which you just expressed. And you can add the terrible mess that Ireland and Greece are in with Portugal and Spain not far behind.  Ordinary families in those countries are feeling a lot of pain which is not going to get better for a long time to come.

 

To add further to your comment re "goods may well be on sale within 3-6 months", here is a recent quote (paraphrased) from Buffett and the CNBC transcript.

 

He was talking about how to value equities and he said this:  "And the real test of whether you would like it (a given stock) as an investment is whether you would be happy if it never got quoted again and just in terms of what the asset did for you"  ie  "the asset is going to keep delivering over time".

 

Something to think about for all of us, inmo. How many equities do each of us own that meet this test? I think it really narrows the field and the landscape when you think about stocks that way.

[doc75]

SD I think you are dead wrong no Wisconsin. Its all just a political agenda and has nothing to do with budgets.

 

Not sure it has "nothing to do with budgets", but there's no question politics is a huge piece of it.  Stirring up fear & loathing & other cynical emotions to push forward an agenda is politics 101.  So much so that it's kind of amazing people keep falling for the old dog-and-pony show.

 

As for alienating voters:  It's absolutely routine during economic downturns to foster showdowns between "taxpayers" and civil servants, particularly teachers (who apparently are not taxpayers?).   You alienate one block of voters but win the fervent support of a much larger block of voters.  

 

The irony of CNN talking heads and well-heeled pundits yapping about teachers/firemen/etc. being overpaid is a bit too rich for me.  I'd like to see them spend more time yapping about how the average worker is *underpaid*, relative to the vast wealth around him.

[Myth465]

http://www.democracynow.org/2011/3/3/really_bad_reporting_in_wisconsin_media

 

I say it has nothing to do with Budgets due to the fact that a large tax cut caused the budget shortfall, and also due to the fact that the union already consented to lower benefits. Its pretty much about collective bargaining and ending it. Republicans dont like unions (hell I wouldnt if I was one) and want to bust them while they can. So first divide them (section off police and fire, we can get them later) then bust the big ones.

 

Politics is all about alienating large blocks of voters lol, you just hope that your block is bigger than the one you are pissing off. Also very interesting. Libertarians favor the enforcement of contracts unless its contracts pertaining to unions or other groups they dont like.

 

---

 

Its not just the CNN talking heads. The average American appears anti union (perhaps its just in the circles I travel in, and I know polls show otherwise) and wants the public sector to have the same raw deal that they have. Its all quite amusing to me. We really deserve the Government we have.