All good here, page-7

"Being "out of the market" sits unwell with me, because it implies that I am able to wade in on the lows (and, hence, sell the highs), which I know I can't.

So I tend, in times like these, to end up sniffing through the garbage for stuff that no one wants.

Trouble is, that is not very often an edifying experience."

Adam

It's the perennial debate.

For me, having a healthy proportion of cash (no, not being out of the market entirely), especially when one can find few compelling opportunities, has nothing to do with trying to time markets. It may at times look like it does, but it doesn't. I see it in two ways. Firstly it is an insurance against a possible correction, and secondly it provides ammunition in the event that an attractive opportunity presents itself (the odds of which obviously rise markedly should said correction occur).

I think you know that my objective is to price rather than to time. So as I am not a timer, I clearly need to make a judgement about what proportion of my capital is going to be "out of the market". We all have our own preferences and biases, all based on varying degrees of rationality. In any case, lest I have not made this abundantly clear already, I have a deep rooted preference for quality business with the promise of enduring, attractive economics. My preference here is partly rational and partly idiosyncratic. I simply like investments that facilate my ability to sleep at night, and that enable me to spend more time on my ass than at a laptop.

But ultimately, everything has its limits. Even a business with a supremely deep moat needs a valuation with some basis in reason. After all, I can hardly consider myself a value investor, as I do, if I don't try to anchor my decision making, to my notion of value. Now I am not the sort of value investor that believes that there is a fundamental difference between value investing and "growth investing". I think that is, in the main, a nonsense. If I am attracted to a business which operates in a sector where there is the ability to invest incremental capital at high rates of return, for an extended period, and if I deem said business possess a deep and durable moat, with management that is focused on preserving said moat, then what I am saying is that the I attach a high likelyhood to the business growing profitably for an extended period.

So my rational assessment of value must include the value of that promised growth. To restrict my assessed value to the straight jacket of PE ratios, or price-to-book, is nonsense.

Nevertheless, the further I project this attractive growth into the future, the more I'm moving from rational assessment of value, to crystal-ball stuff, and the less certainty I can attach to my valuation, and the more I'm moving into the realm of speculation. Of course, there's no hard and fast answer, and in any case, each opportunity has to be assessed on its own merits.

One thing I do know, is that having substantial cash, in the years leading to the GFC, meant that my portfolio didn't fall as much as it might have, and even more importantly, I was able to deploy much of that cash very profitably as the market came crashing down. I was not able to predict where markets were going, back then, anymore than I can now. But what I did know, was that everyone was very confident, markets were very buoyant, and every cabby wanted to talk stocks. Far from thinking I can time markets, for me, a proportion of cash is an acknowledgement that I don't know what the future holds.

Mars