Klarman: The Painful Decision to Hold Cash

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Frank Voisin
Mar 20, 2012
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Seth Klarman is known for keeping a significant amount of cash on hand and being fearless in moving largely to cash at the right times. In his 2004 year-end letter to investors, Klarman covered the decision to move to cash. Scorpion Capital received Klarmans permission to publish this portion of the letter.

The alternative is to remain liquid, defy the steady drumbeat of performance pressures, and wait for the prices of at least some securities to drop. (One doesnt need the entire market to become inexpensive to put significant money to work, just a limited number of securities.) This path also involves risk in that there is no certainty whether or when this will occur; indeed, securities prices could rise further from todays lofty levels, making the decision to hold cash even more painful. Meanwhile, holding out for better returns involves a (potentially lengthy) period of very low (albeit certain) positive returns available from todays shortterm U.S. Treasury instruments.
Read the complete discussion at Scorpion Capital [pdf].

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