‘What the wise do in the beginning, warns Warren Buffett, ‘fools do in the end.’ With the S&P 500 up 148% from its low of 683 in March 2009 despite plenty of unresolved global economic risks, it’s much harder to find deeply discounted stocks and securities and many investors are wondering whether it’s time to get out of the market while the going’s good.
One statistic often used as a contrarian indicator around key market turning points is the propensity of individual and institutional investors to buy and sell to each other. As you can see in the chart below, in 2009 the so-called smart money was buying mountains of stock from panicked individual investors. This herd behaviour explains why so many intelligent individuals make lousy investors.
You also discover this endemic behaviour in the fund flows of large listed fund managers, like Platinum Asset Management and Perpetual. When these companies are full of investing ideas, they’re also suffering redemptions, as retail clients demand their money back before things get any worse, only to miss the ensuing recovery.
Take a look at the chart today. With the market up, liquidity high, credit spreads tight and volatility low, the professional investors have been selling out to individual investors who are finally returning to the market due to the improving outlook for the US economy and their frustration with low interest rates.
Billionaire Leon Black, head of Apollo Global Management, said in April “It’s almost biblical: there is a time to reap and there’s a time to sow” and “We think it’s a fabulous environment to be selling. We’re selling everything that’s not nailed down in our portfolio.”
Many highly successful value investors in the US are also holding large amounts of cash in preparation for more attractive buying opportunities.
For people that live off their investments holding cash is very hard to do, and if interest rates stay low for years to come and somehow China can successfully orchestrate a smooth switch from an investment-led to a more sustainable consumption-driven economy then perhaps share prices could have a way to go yet.
Share Advisor’s model Income and Growth portfolios currently hold 12% and 17% cash respectively, and we expect this figure to increase as this season’s dividends flow in and we sell more businesses as they exceed our estimate of intrinsic value. Do you hold large amounts of cash, how much is too much, or are you always fully invested to ensure, as Peter Lynch said, ‘you’re always caught with your pants up’?