Investors Struggle With Cash Conundrum: Respected investment pros are scouring the world for cheap stocks and bonds, and coming up empty. They are left holding cash, preferring to dilute returns rather than risk buying near the top

Jul 21, 2013

Investors Struggle With Cash Conundrum

By E.S. Browning

Charles de Vaulx has an investment idea: cash.

That may seem an odd choice, since cash earns less than inflation, making it a money-losing proposition. But Mr. de Vaulx, who oversees $17.8 billion as chief investment officer at International Value Advisers in New York, has been boosting his cash position. He is having trouble finding stocks he considers cheap and won’t buy overvalued stocks. He considers bonds even more overvalued than stocks, leaving him perched on a lumpy cash pillow. Other value-oriented investors have made similar choices, led by Berkshire Hathaway Inc. BRKB +0.29% chief executive Warren Buffett. Mr. Buffett is sitting on $49 billion, his biggest cash hoard ever, according to Berkshire’s latest quarterly report. It is an odd spectacle. Teams of respected investment pros are scouring the world for stocks and bonds they can buy on the cheap, and coming up empty. They are left holding some cash, telling their investors and shareholders they prefer to dilute their returns now rather than risk losing a lot by buying near the top.Other money managers — probably the majority — scoff at that. Sure, they say, stocks are more expensive than before, but the growth outlook is still good. Anyhow, alternatives such as bonds and gold look even worse. Those who try to beat the market every quarter can’t believe that anyone would accept below-market returns while waiting for the market to shift.

But value investors such as Mr. de Vaulx won’t buy stocks based on promises. Influenced by Benjamin Graham, the father of modern stock analysis, value investors buy based on businesses’ asset values and measurable past performance. Promises mean little to them.

Mr. de Vaulx adds that cash is dry powder, worth more than people think because it lets him buy cheaply once stocks decline — as overvalued stocks typically do. Like-minded investors realize they may have to wait months or more, as happened in the late 1990s, when broad stock indexes began a surge to record levels that most tech stocks still haven’t seen again. Value investors suffered then but were vindicated when prices collapsed.

Neither Mr. de Vaulx nor Mr. Buffett is predicting imminent collapse, especially given the Federal Reserve’s commitment to stimulating financial markets. Some value investors, in fact, are bitter at the Fed, blaming its easy money for inflating stock prices. But they refuse to hold their noses and buy. In effect, they are ignoring the market admonition: Don’t fight the Fed.

Mr. Buffett, who wasn’t available for comment, has spoken publicly about how hard it is to find cheap investments, while adding that investors shouldn’t abandon stocks but should try to keep playing what he recently called “a game that is heavily stacked in their favor.” Buffett aficionado Matt Pauls, who manages a small hedge fund, says Mr. Buffett is having the same problem as Mr. de Vaulx.

“There aren’t many bargains out there and he doesn’t want to buy something unless it is priced below what he thinks it is worth,” Mr. Pauls explains. “That is going to be his biggest problem going forward.”

One measure of the stock market’s rising price is in data maintained by Yale economics professor Robert Shiller. He compares the price of the Standard & Poor’s 500-stock index to the earnings of its constituent companies. He uses 10-year average earnings to avoid short-term fluctuations. That price-earnings ratio is currently 23.8, the highest since January 2008, before the financial crisis. It exceeds the historical average of 16.5. While the gauge got even higher before past market collapses, it suggests stocks are far from cheap.

Mr. de Vaulx says stocks aren’t vastly overpriced as in 1998 and 2000. He is more concerned about bonds and calls stocks “the best house in a bad neighborhood.”

But he is concerned enough about stocks that he wrote a note to clients explaining his cash buildup.

“We would need stock prices around the world to be at least 15% lower for us to get rid of most of the cash we are holding,” he says.

He considers most stocks to be priced above intrinsic value, meaning what “a knowledgeable buyer would pay in cash for the whole business.” He is waiting for stocks to fall, or at least to stagnate, so they trade below intrinsic value.

Mr. de Vaulx’s benchmark fund, called the IVA Worldwide Fund, cut its stock holdings to 52% of assets from 70% in the 12 months through May. It boosted cash to 29% from 10%.

The timing was unfortunate. Although the IVA fund rose 12% in that period, the Dow Jones Industrial Average jumped 22% and the MSCI All Country World Index rose 17%.

Mr. de Vaulx did put a little cash to work in the June stock slump, although his cash level remains around 25%.

Value investors typically sell too early and miss late-market gains, as stocks often soar well beyond intrinsic value.

But their message is worth considering: Especially with the world economy struggling and the Fed talking about trimming its market stimulus, it is probably riskier to buy stocks today than it was in 2009.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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