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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: gregor_us who wrote (3831)	4/7/2004 2:21:40 PM
From: Elroy Jetson	Read Replies (1) \| Respond to of 116555

I agree this is all taking too long to unfold for my taste. I keep this piece by Bill FLeckenstein around to read, not that it always helps. The Frustration in Holding Cash Bill Fleckenstein October 14, 2003 Now for some thoughts about cash not being trash. Many readers, including some professionals, are very frustrated over the dearth of sound choices on the long side, and unhappy holding cash. While I understand that it's more fun to be in the fray, it's no good to be in the fray if your participation produces losses. I, myself, have absolutely no compunction about holding cash, and feel no need to be involved. Seth Klarman, an absolutely stupendous value investor (whose record would be the envy of almost anybody), is clearly in the cash court, as you will see from his insightful comments made in the most recent issue of Grant's Interest Rate Observer. To put this apparently loathsome asset, i.e., cash, into perspective, Seth dissects folks' faulty rationale: "They compare the current yield on cash (lousy) to the current yield on longer-term bonds or [the] dividend yield (or historic long-term expected total return) from a stock. Cash nearly always loses in this comparison, and investors feel quantitatively justified in doing what career and client pressures cause them to do anyway. It makes no difference how overvalued these alternatives may be in an absolute sense." Folks, that's the OPM factor in action. Further, I would note Seth's point that investments be made "not because cash is bad, but because the investment is good." I think some people lose sight of this fact. They work so hard to earn their cash, but then when they want to get of their portfolios as fast as they possibly can. Now, coming up to Seth's key point, which is ignored by nearly everyone: "One of the biggest challenges in investing is that the opportunity set available today is not the complete opportunity set that should be considered. Indeed, for almost any time horizon, the opportunity set of tomorrow, which could be greater, narrower, or similar in scope but different in specifics from today's, is a legitimate competitor for today's investment dollars. It's hard, perhaps impossible, to accurately predict the volume and attractiveness of future opportunities; but it would be foolish to ignore them as if they will not exist." (All italics in the foregoing quotes are mine.) And that, ladies and gentlemen, is why we hold cash. Because if today's opportunities basically don't look very good, there's no point in burying your money for want of a better idea. If, unable to sit tight, you bury all your money today, when something stupendous comes along somewhere down the road, you may face not opportunity but problems. He writes: "This logic causes them to hold even significant overvalued positions, preferring them to cash. Of course, the same forces that caused bargains to emerge in the future could easily drive the expensive securities they are already holding to much lower levels. For them, future bargains can only be scooped up by selling something else, likely for less cash than it would fetch today." Holding cash when everyone else is partying requires patience, discipline, and the confidence that opportunities will arise down the road. But those that can and do, I assure you, will be glad that they did, somewhere in the not terribly distant future.