Investors Struggle With Cash Conundrum(ZT)# Stock
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Investors Struggle With Cash Conundrum
By E.S. Browning
Reuters
Charles de Vaulx has an investment idea: cash.
That may seem an odd choice, since cash earns less than inflation, making it
a money-losing proposition.
But Mr. de Vaulx, who oversees $17.8 billion as chief investment officer at
International Value Advisers in New York, has been boosting his cash
position. He is having trouble finding stocks he considers cheap and won’t
buy overvalued stocks. He considers bonds even more overvalued than stocks,
leaving him perched on a lumpy cash pillow.
Other value-oriented investors have made similar choices, led by Berkshire
Hathaway Inc. BRKB +0.29% chief executive Warren Buffett. Mr. Buffett is
sitting on $49 billion, his biggest cash hoard ever, according to Berkshire
’s latest quarterly report.
It is an odd spectacle. Teams of respected investment pros are scouring the
world for stocks and bonds they can buy on the cheap, and coming up empty.
They are left holding some cash, telling their investors and shareholders
they prefer to dilute their returns now rather than risk losing a lot by
buying near the top.
Other money managers — probably the majority — scoff at that. Sure, they
say, stocks are more expensive than before, but the growth outlook is still
good. Anyhow, alternatives such as bonds and gold look even worse. Those who
try to beat the market every quarter can’t believe that anyone would
accept below-market returns while waiting for the market to shift.
But value investors such as Mr. de Vaulx won’t buy stocks based on promises
. Influenced by Benjamin Graham, the father of modern stock analysis, value
investors buy based on businesses’ asset values and measurable past
performance. Promises mean little to them.
Mr. de Vaulx adds that cash is dry powder, worth more than people think
because it lets him buy cheaply once stocks decline — as overvalued stocks
typically do. Like-minded investors realize they may have to wait months or
more, as happened in the late 1990s, when broad stock indexes began a surge
to record levels that most tech stocks still haven’t seen again. Value
investors suffered then but were vindicated when prices collapsed.
Neither Mr. de Vaulx nor Mr. Buffett is predicting imminent collapse,
especially given the Federal Reserve’s commitment to stimulating financial
markets. Some value investors, in fact, are bitter at the Fed, blaming its
easy money for inflating stock prices. But they refuse to hold their noses
and buy. In effect, they are ignoring the market admonition: Don’t fight
the Fed.
Mr. Buffett, who wasn’t available for comment, has spoken publicly about
how hard it is to find cheap investments, while adding that investors
shouldn’t abandon stocks but should try to keep playing what he recently
called “a game that is heavily stacked in their favor.” Buffett aficionado
Matt Pauls, who manages a small hedge fund, says Mr. Buffett is having the
same problem as Mr. de Vaulx.
“There aren’t many bargains out there and he doesn’t want to buy
something unless it is priced below what he thinks it is worth,” Mr. Pauls
explains. “That is going to be his biggest problem going forward.”
One measure of the stock market’s rising price is in data maintained by
Yale economics professor Robert Shiller. He compares the price of the
Standard & Poor’s 500-stock index to the earnings of its constituent
companies. He uses 10-year average earnings to avoid short-term fluctuations
. That price-earnings ratio is currently 23.8, the highest since January
2008, before the financial crisis. It exceeds the historical average of 16.5
. While the gauge got even higher before past market collapses, it suggests
stocks are far from cheap.
Mr. de Vaulx says stocks aren’t vastly overpriced as in 1998 and 2000. He
is more concerned about bonds and calls stocks “the best house in a bad
neighborhood.”
But he is concerned enough about stocks that he wrote a note to clients
explaining his cash buildup.
“We would need stock prices around the world to be at least 15% lower for
us to get rid of most of the cash we are holding,” he says.
He considers most stocks to be priced above intrinsic value, meaning what “
a knowledgeable buyer would pay in cash for the whole business.” He is
waiting for stocks to fall, or at least to stagnate, so they trade below
intrinsic value.
Mr. de Vaulx’s benchmark fund, called the IVA Worldwide Fund, cut its stock
holdings to 52% of assets from 70% in the 12 months through May. It boosted
cash to 29% from 10%.
The timing was unfortunate. Although the IVA fund rose 12% in that period,
the Dow Jones Industrial Average jumped 22% and the MSCI All Country World
Index rose 17%.
Mr. de Vaulx did put a little cash to work in the June stock slump, although
his cash level remains around 25%.
Value investors typically sell too early and miss late-market gains, as
stocks often soar well beyond intrinsic value.
But their message is worth considering: Especially with the world economy
struggling and the Fed talking about trimming its market stimulus, it is
probably riskier to buy stocks today than it was in 2009.
By E.S. Browning
Reuters
Charles de Vaulx has an investment idea: cash.
That may seem an odd choice, since cash earns less than inflation, making it
a money-losing proposition.
But Mr. de Vaulx, who oversees $17.8 billion as chief investment officer at
International Value Advisers in New York, has been boosting his cash
position. He is having trouble finding stocks he considers cheap and won’t
buy overvalued stocks. He considers bonds even more overvalued than stocks,
leaving him perched on a lumpy cash pillow.
Other value-oriented investors have made similar choices, led by Berkshire
Hathaway Inc. BRKB +0.29% chief executive Warren Buffett. Mr. Buffett is
sitting on $49 billion, his biggest cash hoard ever, according to Berkshire
’s latest quarterly report.
It is an odd spectacle. Teams of respected investment pros are scouring the
world for stocks and bonds they can buy on the cheap, and coming up empty.
They are left holding some cash, telling their investors and shareholders
they prefer to dilute their returns now rather than risk losing a lot by
buying near the top.
Other money managers — probably the majority — scoff at that. Sure, they
say, stocks are more expensive than before, but the growth outlook is still
good. Anyhow, alternatives such as bonds and gold look even worse. Those who
try to beat the market every quarter can’t believe that anyone would
accept below-market returns while waiting for the market to shift.
But value investors such as Mr. de Vaulx won’t buy stocks based on promises
. Influenced by Benjamin Graham, the father of modern stock analysis, value
investors buy based on businesses’ asset values and measurable past
performance. Promises mean little to them.
Mr. de Vaulx adds that cash is dry powder, worth more than people think
because it lets him buy cheaply once stocks decline — as overvalued stocks
typically do. Like-minded investors realize they may have to wait months or
more, as happened in the late 1990s, when broad stock indexes began a surge
to record levels that most tech stocks still haven’t seen again. Value
investors suffered then but were vindicated when prices collapsed.
Neither Mr. de Vaulx nor Mr. Buffett is predicting imminent collapse,
especially given the Federal Reserve’s commitment to stimulating financial
markets. Some value investors, in fact, are bitter at the Fed, blaming its
easy money for inflating stock prices. But they refuse to hold their noses
and buy. In effect, they are ignoring the market admonition: Don’t fight
the Fed.
Mr. Buffett, who wasn’t available for comment, has spoken publicly about
how hard it is to find cheap investments, while adding that investors
shouldn’t abandon stocks but should try to keep playing what he recently
called “a game that is heavily stacked in their favor.” Buffett aficionado
Matt Pauls, who manages a small hedge fund, says Mr. Buffett is having the
same problem as Mr. de Vaulx.
“There aren’t many bargains out there and he doesn’t want to buy
something unless it is priced below what he thinks it is worth,” Mr. Pauls
explains. “That is going to be his biggest problem going forward.”
One measure of the stock market’s rising price is in data maintained by
Yale economics professor Robert Shiller. He compares the price of the
Standard & Poor’s 500-stock index to the earnings of its constituent
companies. He uses 10-year average earnings to avoid short-term fluctuations
. That price-earnings ratio is currently 23.8, the highest since January
2008, before the financial crisis. It exceeds the historical average of 16.5
. While the gauge got even higher before past market collapses, it suggests
stocks are far from cheap.
Mr. de Vaulx says stocks aren’t vastly overpriced as in 1998 and 2000. He
is more concerned about bonds and calls stocks “the best house in a bad
neighborhood.”
But he is concerned enough about stocks that he wrote a note to clients
explaining his cash buildup.
“We would need stock prices around the world to be at least 15% lower for
us to get rid of most of the cash we are holding,” he says.
He considers most stocks to be priced above intrinsic value, meaning what “
a knowledgeable buyer would pay in cash for the whole business.” He is
waiting for stocks to fall, or at least to stagnate, so they trade below
intrinsic value.
Mr. de Vaulx’s benchmark fund, called the IVA Worldwide Fund, cut its stock
holdings to 52% of assets from 70% in the 12 months through May. It boosted
cash to 29% from 10%.
The timing was unfortunate. Although the IVA fund rose 12% in that period,
the Dow Jones Industrial Average jumped 22% and the MSCI All Country World
Index rose 17%.
Mr. de Vaulx did put a little cash to work in the June stock slump, although
his cash level remains around 25%.
Value investors typically sell too early and miss late-market gains, as
stocks often soar well beyond intrinsic value.
But their message is worth considering: Especially with the world economy
struggling and the Fed talking about trimming its market stimulus, it is
probably riskier to buy stocks today than it was in 2009.
