“It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.”
Doing nothing, as hard as it may be when you have cash on hand, may sometimes be the best option in pricey markets. Buffett has said that he prefers to put his cash to work, but if there are no opportunities then it’s good to be patient. As he puts it, “In investments, there’s no such thing as a called strike. You can stand there at the plate and the pitcher can throw the ball right down the middle, and if it’s General Motors at $47 and you don’t know enough to decide General Motors at $47, you let it go right on by and no one’s going to call a strike. The only way you can have a strike is to swing and miss.”
Consider the case of Sam Zell. In what would turn out to be exceptional timing in his sale of Equity Office Properties to Blackstone for $39 billion in February 2007, Zell promptly reinvested in a very suspect business. In April of the same year Tribune Co. had accepted Zell’s $8.2 billion leveraged offer for the newspaper/media business.
Surely Zell would be endowed with a hoard of cash upon the sale of his commercial real estate. Being the real estate mogul he was, Zell was probably well in tune to the pricey real estate market so instead plowed his capital into another business that appeared cheap. If the economy never soured maybe Tribune wouldn’t have needed to file for bankruptcy, but was the move to buy the company motivated by a lack of patience? Did he feel as though he couldn’t keep the cash in low risk securities and so instead plowed it into a business he was hardly a specialist in?
Patience is a terribly important quality for investing. Seth Klarman has been known to hold as much as 30% of his hedge fund assets in cash. Despite being weighed down by earning next to nothing he has still managed to grow his hedge fund by 20% per year.
Today the total stock market is valued as greatly as U.S. GDP as Gurufocus reports. When the total stock market is valued close to GDP it falls into a somewhat expensive region. Though it’s not terribly expensive, the stock market is by no means cheap. If you are buying shares today you should ask yourself, "Why you are buying?" Is it because you see stocks rise and you don’t want to be left behind? Is it because it seems like stocks are better than bonds and other rates of return?
A central theme to this website is identifying those stocks the likes of Warren Buffett, Seth Klarman and others have bought and at the price at which they were bought at. Though we must estimate the price paid, we have an idea based on the quarter the shares were purchased. The price paid is especially important with investors such as Klarman. Klarman seemingly loves the price better than the business. If you watch his portfolio you will see positions decline as prices rise and grow as prices fall. Buffett, by contrast, may be willing to hold when the stock has grown dear, but he certainly won’t be buying more shares when the price has grown dear. Many of the shares Buffett has purchased of late have grown dear.
Walmart (WMT), Wells Fargo (WFC), IBM (IBM) and Tesco (TSCDY) (though still less than what he paid in November of last year) have all seen marked increases as of late. Would Buffett continue buying at these higher prices? With the exception of maybe Tesco, I doubt he would. If stocks are not terribly attractive then employing patience as a strategy is a good idea. Though inflation does erode your capital very slowly, overpaying for a stock will result in much greater erosion of your capital.