Tuesday 16 November 2010

Cash is King - 2010 Version

Cash is King - 2010 Version

A couple of days back, I came across an article which spoke about Warren Buffett holding 34% cash levels in his Berkshire Hathway portfolio as on September 30, 2010.

I've generally been increasing my cash levels for a while now.

Today, I came across this interview with another big name - Jeremy Grantham. Read this one:

Lots of TV analysts and experts have also been crying themselves hoarse that our markets in India are grossly overvalued. And have been recommending that we be cautious. That we ought to increase cash levels. That we ought to be booking profits. That though the "Long-term India Story" remains intact, we ought to be wary in the short term.

I have a contrarian question:

  • If so many folks are so cautious, and if so many retail guys have not participated in the rally, is it not logical that we're not anywhere close to the top, based on all the bubbles that we've experienced in the last couple of centuries?

My own answer to the above question:

Yes, indeed. We are nowhere near the top. Here's why:

  • There is a good chance that with all the guys who are waiting in the wings with loads of cash, every dip will be bought into. Especially by Indian retail investors and the domestic institutions, who have actually been booking profits regularly during the past 6-8 months.
  • The BIG MONEY coming from all the quantitative easing will need to be deployed. Certainly they are not going to invest in the crisis ridden markets of US or Europe. Nor will they invest in debt at yields pretty close to zilch. They will much rather park their money in good quality growh stories. Where else can they find such stories other than in the emerging markets, including India?
  • The 21000 of 2008 and 21000 of 2010 are very different. A good many corporates have increased their earnings. A lot of them have restructured their leveraged balance sheets and cleaned up their acts. Many of them are much leaner, having learned their lessons. Operational efficiencies have improved. Even the reform agenda of the government has gathered some momentum. Valuations, certainly, are not as rich and as obscene as they were in January 2008.
  • Even in the midst of all the corruption, there appears to be lots of political stability. We actually have a situation where there is competition to support the government. That too, publicly stated on National Television. Believe me, Manmohan Singh's position appears to be quite safe. And as long as you have political stability, one key danger for the markets is gone.
  • People will make noises about inflation, but go to the malls, theatres, cricket stadiums, airports, book shops, restaurants, jewellery shops, etc. You'll be amazed at the speed with which products are flying off the shelves. You'll wonder about the existence of such a creature called poverty.

Having said all the above, you must be wondering why I'm still increasing my cash levels.

Reasons are two-fold:

  • Churning of the portfolio. Some stocks have zoomed way beyond 2008 valuations. We ought to be selling them. Others are grossly undervalued, especially in the midcap space. We ought to be looking at them carefully.
  • There is a lot of global economic uncertainty. In times of uncertainty, I've often come across completely inexplicable and violent levels of volatility in share prices. This volatility is a scary scenario for those who seek stability. There are others who thrive in such volatility. I prefer to think that volatility is good for me. Gives me a lot of opportunities both to get in at low levels and to get out at comparitively high levels.

So, what's the conclusion?

Simple ... ... ... ... ... ...

  • Keep selling anything that you feel is overvalued today. Irrespective of what your cost price was. Profit in your bank account is better than profits in your demat account. And don't worry about whether or not the share that you just sold continues to go up further. It is always possible to have perfect 20-20 vision - in hindsight.
  • Keep cash in your kitty.
  • Keep buying anything that you like and you feel is undervalued today. People make more money by buying at a low price than by selling at a high price.
  • And remember, you can never, never ever, catch the bottom and the top - except with some crazy luck. And I wouldn't count on getting lucky.

Let me end with a quote from Jeremy Grantham (from the interview referred to earlier in this post):

  • "Cash has a virtue that people don't appreciate fully. And that is its optionality. In other words, if anything crashes and burns in value - say the U.S. stock market, if you have no resources, it doesn't help you. If the bond market crashes, and you have no resources, it doesn't help you. And what cash is is an available resource. It buys you the right to buy the U.S. market if the S&P drops from 1,220 today to 900, which is what we think is fair value."

Guess that it applies to us in India as well!

Take care. Happy investing!

Regards,

N


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