It gives me pause for thought when investors I have a great deal of respect for are saying or doing things that don’t quite tally with my own philosophy. And that’s the situation right now with cash.
I’ve always believed that aside from holding a small buffer of cash for a rainy day, surplus funds are generally best invested for long-term higher returns in productive, cash-generating assets, via shares in companies listed on the stock market or privately owned businesses.
After a decade of miniscule interest rates, no one seems to think holding a large swathe of cash is a good thing … except for a number of those aforementioned investors I have a great deal of respect for!
Warren Buffett’s cash mountain
Over the last few years, veteran US investor Warren Buffett’s Berkshire Hathaway group has accumulated an enormous cash pile. At the last half-year end, it stood at $122bn, compared with a portfolio of listed companies worth $208bn. And at the end of Q3, it had risen again to $128bn.
Berkshire hasn’t made an acquisition since January 2016. It’s not that Buffett doesn’t want to. He’s said it’s simply that“prices are sky-high for businesses possessing decent long-term prospects”. Berkshire has added selectively to its portfolio of shares in listed companies, but evidently has seen insufficient value in the market to deploy enough capital to stop its mountain of cash growing ever bigger.
I suspect it’s no coincidence that Berkshire’s cash pile has increased to record levels in lock-step with one of Buffett’s favourite yardsticks of US stock market overvaluation.
The market’s capitalization as a percentage of gross domestic product reached a record 146% at the height of the dot-com bubble in 2000 (compared with an average of 89% since 1975) and peaked again at 137% just ahead of the financial crisis in 2007. In the last couple of years it has surpassed 150%.
Singing the same tune
Here in the UK, two investors I much admire – Sebastian Lyon (at Personal Assets Trust) and Peter Spiller (at Capital Gearing Trust) – have been singing the same tune as Buffett on equity valuations, and their respective portfolios are similarly high on cash and low-risk liquid assets.
Lyon believes equity markets today offer “an invidious choice to investors” between overvalued quality on the one hand and cyclically or structurally challenged ‘cheap’ stocks on the other. His equity exposure is currently 33% of assets.
Similarly, Spiller sees “elevated equity and bond valuations”, and capital preservation as a key objective, “until valuations return to more attractive levels”. His equity exposure is currently 35% of assets.
Some ‘dry powder’
Returning to my headline question, should you sell all your stocks and hold cash in 2020? First, successfully timing the market in such a way is notoriously difficult. And doing it over an investing lifetime even more so. Second, Buffett, Lyon, and Spiller do see pockets of value in the market, so reckon there are still some stocks out there at prices worth paying.
I don’t believe selling all your stocks and holding cash in 2020 is a good idea. However, if you’re seeing bargains in the market, left, right, and centre, I think it probably wise to tighten up your investment criteria a bit. You may find this gives you some ‘dry powder’ to take advantage of a market crash, if it does happen.
