• Benefits of Private Money Management

  •  Cash
      Although the use of cash is not really a tactic - and the level of cash often not the result of a deliberate effort - it can be discussed here. A value investor (such as ourselves) does not make bets on market direction or timing. Rather, he buys things when they are good value. If he finds something to buy but has no cash, he sells his least undervalued asset to replace it with the new, more undervalued asset. But he feels no need to be fully invested at all times. So if there are no good values then he does not buy, resulting in a high cash allocation. By default, then, he becomes a market timer, but the high cash position is a result of finding no value, not a goal in and of itself.

    As Jean-Marie Eveillard puts it, "cash is a residual." But that residual can be quite high if there are no values.

    Another value investor, Seth Klarman says investors "should choose to hold cash in the absence of compelling opportunity," again emphasizing that high cash is not a top-down allocation, but the result of the bottom-up search for bargains. He tells his investors who query why they are paying him to hold cash. "You are not. You are paying us to decide when to hold onto cash and when to invest it", an answer with which we would concur.

    At Adrian Day Asset Management, in addition to this approach, we also overlay our assessment of the general market risk profile. If the overall risk appears high, then we will insist on greater and more sure values before buying. 

    When values are somewhat high, rather than buy outright, we may sell puts on stocks we like, at below market strikes. In this way we can generate additional income, while exposing ourselves to sectors and equities we like. (For more on this, see "Options", one of the discussions under "Investment Tactics.") In such cases, we always set aside the cash that would be required were an option put to us; thus not all our cash is necessarily unrestricted, and may be working for you anyway.

    When we talk of cash, we are primarily thinking of U.S. cash (or cash equivalents). We may purchase foreign currencies, holding in cash equivalents, as a hedge against the dollar, an investment in and of itself. But again, if we find good values in foreign stock markets, we will generally prefer to hold equities than foreign currencies. 

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