The Waiting Game

[VAL9000]

Hi everyone,

 

I wanted to share some thoughts on where I think the market is right now, and where I think we're going.  I'm not a huge macro guesser, but I believe in cycles.

 

Here's my thinking:

- Current price on most equities is starting to get dear.  I'm looking at the businesses I have bought over the past few years and am thinking at these prices it's difficult to justify buying more.  I can't locate any fat pitches right now - just good long term stable buys at fair prices.

- I think equities will continue to rise into stupid valuation territory over the next couple of years.  Current policies in the US are going to be pumping money into the system for the next year or three - both from a monetary and fiscal perspective.  This virtually guarantees net buying activity, which will push equities up regardless of valuation.  We're seeing lots of fund flow activity reinforcing this idea today.

- The alternative asset class of choice, debt, totally sucks right now.  There are other asset classes, but I am too lazy to learn them.  Plus I don't think that they offer significant protection from a market correction.

 

It's like investing in equities right now is a damned if you do, damned if you don't scenario.  This is a bad place to be as a value investor.

 

What's a fella to do?

 

I am going to play the waiting game.  Most of my portfolio has cycled from "good company, great valuation" to "great company, good valuation" over the past year.  My thinking is this is where you want to be heading into the tail end of a bull market to catch the upside and minimize the downside.  I would prefer to have some debt investments, but I'm waiting for rates to rise.

 

To me this is the hardest period in investing that I have ever encountered.  It must be because prices are so fair in equities right now.  Nothing I hold is truly overvalued and worth selling.  Nothing I see is obviously cheap and worth buying.

 

I believe my greatest challenge now is patience.  I always thought that patience was what you required when you bought something cheap and were waiting for the price to correct.  But it turns out that's easy patience.  Hard patience is when you have to force yourself to do nothing because there is nothing to do.  It is really hard to just sit and wait.

 

Is anyone else struggling with this today?  I need group therapy that addresses inaction.

 

[giofranchi]

VAL9000,

I agree with most of what you have written. Except that, personally, I don’t find it so hard “to just sit, wait and do nothing”. Not that I am such a lazy boy! It is just that I can shift my attention to improve the operating side of my businesses. Until things change, and some new, intelligent opportunity for capital allocation comes up. You don’t have to be a business owner, to behave like that. Any profession or a job provide you with the same optionality. Just focus on improving your cash generating abilities, and, when the right moment comes, you will have a lot of capital to put to work!

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[JEast]

To paraphrase one of the patriarchs of value investing, 'buy 50¢ dollars when you can'.  I understand everyone's apprehension of a frothy market, but does not the market climb the wall of worry?

 

Here is hoping that a fella's waiting game does not turn into The Crying Game as a fella might get a surprise!!  Could not resist the reference for you movie buffs out there.

 

Cheers

JEast

[giofranchi]

Great answer from Mr. Watsa on the importance of building cash, when there are not many opportunities:

 

Tom MacKinnon - BMO Capital Markets Canada

Just again to ask the question -- I asked a similar question the last quarter, but you're getting underwriting

improvement here, certainly from an accident year, excluding cat spaces. But the drag from being 31% invested in

cash continues to kind of weigh on your operating results, if you will. What's it going to take for you -- or what sort of signals, or would you look -- for in the market before you'd want to reduce that cash position? Is there anything

other than just you think you're going to wait and get a better return? Or what's driving you to continue be 31%

invested in cash?

 

V. Prem Watsa

That's a very good question, Tom. We've got about 30% cash, a significant amount of cash in the company. First of all, the -- as I said in our opening remarks, there's a disconnect from the financial markets, and I mean stock and bond markets here, versus the underlying fundamentals. What do I mean? Well, stock markets have gone up very significantly from the end of 2009, from the March of 2009, the bottom, gone up more than 100%, and the spreads between corporate bonds and treasury are now comparable to what they were prior to 2008. And the economy, even last quarter, the United States was flat, or down 0.5%. So in spite of QE3, in spite of QE2, QE1, all of that massive stimulus, monitory stimulus, hasn't had much of an impact on the economy. And so we're just thinking that it's a time to be conservative, but we think what happened in the '08, '09, was not like any other economic recession. Tom, we mentioned a few times, we think this is a 1 in 50, 1 in a 100-year storm, so you have to be prepared for its after effects. We don't think it just lasted for 3 and 6 months, and so now we can go forward. And this is an opinion by the way, and we could very much be wrong. And so we just feel that way. As far as the 30% cash, remember, that can change. So in 2008, and we had this position in 2007, in 2006. 2008, things turned the financial markets. Stock markets dropped, during that time, about 50%, and so we took our hedge off. And spreads widened significantly like really huge spreads. And Tom, the only people who could benefit from that were the people who had cash or government bonds. And so we are conscious of that in our history. Cash gives you options, gives you the ability to take advantage of opportunity but you have to be long-term. We have built our company with a long-term view. Our long-term results are excellent. For example, in 2007, '08, and '09, the 3 years, 2007, 2008, 2009, we made $2.8 billion after tax, our book value went up by 150%. Since that time, we haven't done a lot. But we've said to our shareholders that we are long-term focused, our results are lumpy and we never know when it can change. But the cash gives us a huge advantage in terms of taking advantage of opportunity as and when they come. At the moment, we don't think they're many, so we are building cash. I did say, one last point, that in 2011 and 2012, we've realized, this is -- when I say realized, I mean we've sold stocks and bonds, and realized $1 billion in each year. But it's masked by the mark-to-market accounting, which takes the fluctuations and substracts from that $1 billion. We think, over time, those things will work themselves out. And so we really think we're in a very good position, but always, with a long-term viewpoint, Tom.

 

Q4 2012 FFH Conference Call

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

[Kraven]

Here is hoping that a fella's waiting game does not turn into The Crying Game as a fella might get a surprise!!  Could not resist the reference for you movie buffs out there.

 

Cheers

JEast

 

Nicely done.

[boilermaker75]

To paraphrase one of the patriarchs of value investing, 'buy 50¢ dollars when you can'.  I understand everyone's apprehension of a frothy market, but does not the market climb the wall of worry?

 

Here is hoping that a fella's waiting game does not turn into The Crying Game as a fella might get a surprise!!  Could not resist the reference for you movie buffs out there.

 

Cheers

JEast

 

I get the movie reference, but not one I wanted to be reminded of!

[premfan]

Having hobbies and other things to focus on is key when you see no fat pitches. Focus and set goals in other areas of your life. Diversify your interests a bit more and explore your town or city ( go to groupon.com for good deals on fun stuff to do). As Mr. Pabrai says be a man of leisure.  The market is here to serve you.

 

If you see no fat pitches:

 

1.) Look harder for fat pitches

 

2.) Make goals in other areas in life ( Maybe want to get leaner for summertime)

 

3.) Go over your list and read the annual reports of companies you have a conviction in that might be creeping towards a potential buy.

 

 

 

 

 

[Packer16]

What you could do is expand your circle of competence.  There are some interesting areas of high yielding investments in the leasing, banking and real estate spaces.  Real estate is so large you could spend alot of time just becoming familiar with that space.  I am trying to look at this area and may attend the  Brookfield annual meeting to start in this area.  (Note: our friend Plan has found an interesting transformation stock in GKK - going from a CDO in investor to a NNN company).

 

Packer

[txlaw]

I have had a different experience.  I have more ideas than capital.

 

Certain sectors that could very well contain fat pitches:

-Automotive

-Health insurance/care

-Nat gas

 

Certain financial companies are still way undervalued, and just because they have gone up in price does not mean that they are not fat pitches.

 

So I continue to be 100% long.  But I'm also willing to forego the possibility to buy very cheaply on a market correction, which I acknowledge could happen.

 

Also, there's a difference between waiting to put capital to work and focusing one's activities on non-investment related activities.  You could still use your time to learn about companies that are fairly valued or overvalued to expand your circle of competence, even if you don't make any investment decisions.

[Guest wellmont]

a  private investor imo should most often be focused on the smaller stocks in the market. there are lots of them to keep an investor busy. there are times, however, when some large stocks are very inefficiently priced. Special situations like aig, for example.

[Palantir]

I do not believe that small stocks necessarily offer better opportunities than larger ones. I have seen some large stocks absolutely egregiously priced. (GOOG last summer). Rather I think that some of the best opps are in the mega cap sector. Many of these firms are great businesses that generate a lot of cash and have major switching costs. Even if they do not grow much, they can put out a huge dividend.

 

I think for the OP, the "great company, ok value" is a good way to invest in this market. In my opinion, you can "juice" this by selling puts on companies that are only moderately undervalued. So stocks that are not so fully valued that they are unattractive, but overvalued by a small amount so they are not "buys" either. You should set it up so that even if the put gets triggered the Strike+option cost <= your target buy.

 

Eg, stock is worth 130, target buy is 100, trading at 115. Try to find put that if triggered will let you buy at an effective cost of 100. Say X=105, Premium= 4.90.

[biaggio]

 

Good thread Val9000.

 

Agree with posters above-wait, plan (expand your circle of competence), marshal your resources...but dont bet it all unless you have gonads like ERICOPOLY.

 

Its painful waiting if you have cash in my opinion at least partly because while you re waiting for your opportunity the purchasing power of your cash is slowly eroding. I am one that think the real CPI is higher than what the government says- no official data- just what I have noticed at the gas pump, Tim Hortons, and grocery store.

[eclecticvalue]

But it seems like Dalio, Tepper, and Buffett are doing opposite what everyone on this board is doing. Just to rehash the fed wants investors to move cash in risky assets. In this case the investors I mentioned above are dipping in first and I wouldn't be surprised to see others follow.

[Yours Truly]

There's always something to do.. There's always spinoffs, merger arbs, etc

 

I currently have over 150 companies on my watch list and when the market isn't offering any deals, I pick a company on the list and absorb myself in its financials, presentations, webcasts, conference calls.. So when the time comes, I'll be ready.. Plus it aids in building that all too important circle of competence