Sept. 30, 2013

There's a world-famous value manager who stopped buying stocks in 2007 and started to hoard more and more cash. He was not predicting the Financial Crisis or the Credit Crash that would lead to a 60% drop for the S&P over the next two years. He simply couldn't find enough stocks to buy that fit his value parameters. That discipline helped him (and his clients) avoid much of the carnage that followed in 2008. The worst thing I could say about the current moment in the US stock market is that as value managers, like in 2007, we are struggling to find cheap stocks. The S&P 500 currently sells for a high market multiple historically and an even richer multiple considering what the growth picture currently looks like.

In the meantime, many value managers are increasingly hoarding cash - either because they can't find compelling values or because they foresee better opportunities ahead.

According to Bloomberg, it seems to be a trend:

The $1.1 billion Weitz Value and $980 million Weitz Partners Value funds each have cash stakes that are close to 30 percent. At the $10.6 billion Yacktman Focused fund, cash has crept up from 14 percent a year ago to 19 percent. The $1.3 billion Westwood Income Opportunity has about 16 percent in cash, more than double what it had at the start of the year. Cash makes up about 28 percent of assets in the $8.9 billion IVA Worldwide Fund, up from 10 percent a year ago, and is 33 percent of the $508 million GoodHaven fund, up from 19 percent a year ago.

There’s no big macroeconomic prediction fueling the move of these value managers into cash; just employing the simple investing discipline of rebalancing. The Leuthold Group reports that the median price-earnings ratio for large-cap value stocks is 13 percent to 25 percent above its long-term historic norm; large-cap growth stocks trade at an 8 percent to 10 percent discount to their historic norm.

Warren Buffett, according to the latest SEC filings of Berkshire Hathaway, he has raised and is sitting on, $49 billion in cash And in a recent interview he said, “Stocks have moved a long way. They were very cheap five years ago. That’s been corrected...We’re having a hard time finding things to buy.”

There are many differences between now and late 2007 before the crisis - but the current state of valuation is as clear as a bell. We're not cheap here and would benefit greatly from either a real correction in stock prices or a revenue growth spurt to justify current valuations.

Which is it going to be?