Do you follow Buffett in cash?

What Buffett’s Shift to Cash Means… Should You Be Overweight Cash? … lump sum investments vs. dollar cost averaging … how Eric Fry rates AI investments today

If Buffett is moving into cash, so am I.

That was the conclusion from a friend when we discussed the scholarship yesterday.

His argument was rooted in logic, punctuated by various “buffetisms”.

For example, to support his point, he referenced Buffett’s popular quote: “Be fearful when others are greedy and greedy when others are fearful.” His logic was that with the market near all-time highs today, people are greedy.

He also pointed to the “Buffett indicator,” which is the ratio of the total U.S. stock market to U.S. GDP. Today, it suggests stocks are incredibly expensive.

By the way, make no mistake about it. Below, you can see that as of June 30, the Buffett indicator has reached 202%, giving it a “strongly overvalued” reading of two standard deviations above the mean.

My friend also cited Buffett’s recent sale of Apple, a recent article suggesting that Buffett is bracing for a higher corporate tax rate from Kamala Harris (he thinks he’ll win), the fact that Buffett now owns more treasuries than the Federal Reserve and then the overall market which is now trading just below all-time highs.

Put it all together, and the idea for my friend was simple: go overweight… by a lot.

Is such a move the right call for you today?

After all, if this market is so unattractive to Buffett that he now owns the most money in the history of Berkshire Hathaway, should you and I follow suit?

Well, to begin our analysis, let’s begin with an important question…

Do you own a billion dollar portfolio?

Buffett is a victim of his own success.

When you make as much money as he has over decades, your portfolio grows so enormously that it limits your universe of potential investments. But with a smaller portfolio size, the world is your oyster.

Let’s go back to this gem from Buffett in 1999:

The highest rates of return we ever achieved were in the 1950s. We killed the Dow. You should see the numbers. But then I was investing peanuts.

It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee you that.

One of the reasons Buffett has so much cash today is that there aren’t that many great investment options in his weight class.

Analyst John Huber recently released the numbers on what this means. from MarketWatch:

Buffett manages a portfolio of about $600 billion. Working backwards, there are only 27 US stocks with a market cap of $300 billion, where a 10% position in the company and 5% of the Berkshire Hathaway portfolio would be worth $30 billion. Expanding its stock of stocks overseas, there are another 100 it might even look at, says Huber.

“The incredible size of the portfolio, plus the high valuations of large-cap stocks, makes it nearly impossible to put cash to work at the rates of return they would like (double digits),” says Huber. “It’s not a market calendar, it’s just a product of valuation levels and a very small set of opportunities that shrink every year.”

This is a key line – “it’s not market time”.

I’m pretty sure that if Buffett were only running $1 million today, he’d be fully invested or close to it, and he certainly wouldn’t bemoan the lack of investment opportunities.

But what about the high returns on today’s savings accounts and the risk of a market crash?

High yield cash accounts can feel safe. And in the short term, they are. But parking too much of your net worth in cash, for too long, is a terrible idea.

Sure, you’ll sidestep a potential market crash…but the opportunity cost will likely be worse than the crash itself.

To illustrate, below is data from T. Rowe Price comparing the returns of stocks, a 60/40 portfolio, bonds and cash for the 30 years between 1993 and 2023.

Despite all the bear markets and corrections along the way, stocks returned about 18X, while cash only returned 2X.

And if you want to take a walk down memory lane on all the reasons to ditch stocks in this time frame, enjoy the chart below.

Remember – exiting the market is the easy part. The comeback is where the challenge lies.

So does that mean you should only find the best stocks you can, then cannonball today?

Well, yes… (with some qualifications).

One of the big questions of investing is “do you go all in with a large amount of cash or do you drip it in slowly.”

If we go by the numbers, the wisest plan is to put everything on the market right now—today—and be done with it.

Vanguard conducted a study that spanned 1976 to 2022. It found that lump sum investments beat dollar cost averaging (DCA) 68 percent of the time after one year.

This advantage occurs because lump sum investing maximizes the time your money is in the market, allowing it to pay for itself over a longer period.

Morgan Stanley conducted a similar study, concluding that in more than 55% of cases, lump sum investments generated slightly higher annualized returns compared to DCA. And a study by Northwestern Mutual found that over a 10-year period, lump sum investments beat the DCA about 75 percent of the time.

Now, while the statistics favor lump sum investing, there’s a good reason why it terrifies so many investors…

When you choose a lump sum and get the timing wrong, it’s brutal.

This leads us to practical implementation strategies…

The longer your investment horizon, the more you should use a lump sum.

The shorter your investment horizon, the more likely DCA is a better fit – at least from a psychological perspective. It balances the “offensive” need to be invested with the “defensive” need to avoid a major portfolio drawdown that could affect your retirement or financial goals.

So how long does your investment horizon need to be for the offensive firepower of lump sum investing to overcome the defensive posture of DCA?

There is no perfect break-even point. But most studies suggest it’s in the three to five year range.

A critical detail…

Whether your next equity allocation is a smaller DCA or a massive lump sum, commit to it. In other words, don’t do what I’m about to show you.

Below is the latest meme that illustrates how most investors have handled the recent market volatility. The stock market line is a vague but accurate proxy for what the S&P just did.

Take a moment and ask yourself some questions today…

How exposed are you to the market today? Does your exposure level adequately reflect your investment horizon and/or risk tolerance? Or are you potentially underinvested (or even overinvested)?

Back to my friend, I think he is basing his investment decisions on someone else’s market strategy. Unless his overweight cash position is timely and relatively short-lived, I fear it may be counterproductive to his long-term goals.

Are you in danger of the same thing – whether you are too conservative or too aggressive?

As investors, we need to do these occasional checks to protect against “emotional drift.” By this, I mean the tendency to let short-term emotions (fear or greed) result in a portfolio composition that no longer accurately reflects long-term goals.

So where are you today?

Now, that doesn’t mean investors can ignore today’s valuations for certain stocks, even though we’re excited about various opportunities

On that note, let’s go back to the Dot Com boom of 1999/2000 and the valuation landscape at that time.

Here’s our macro expert Eric Fry:

In January 2000, investors knew the Internet would change the world. So the market caps of the top 5 tech stocks rose to record highs…

• Microsoft Corp. (MSFT) to 600 billion dollars
• Cisco Systems Inc. (CSCO) to 316 billion dollars
• Oracle Corp. (ORCL) to 308 billion dollars
• Intel Corp. (INTC) to 275 billion dollars
• IBM Corp. (IBM) to 188 billion dollars

All of this felt perfectly reasonable at the time.

However, these companies could not stay at those lofty valuations, and all but IBM declined over the next decade. In fact, Cisco and Intel are still trading below their 2000 peaks.

The truth is that high stock prices have a habit of robbing future investors of their returns. If a stock goes up 10% today, that usually means 10% less is available for tomorrow. And even the highest-growth companies can take decades to “fill in” inflated market valuations… if they ever do.

As Eric points out, evaluation matters. many.

So what does this mean for AI, today’s proxy for the Internet boom of 2000?

If AI stock is trading at horribly inflated valuations on par with the Dot Com peak, then a lump sum investment today might not be a great idea. DCA would seem wiser.

But perhaps there are smaller, more obscure AI plays trading at attractive valuations that will turn into tomorrow’s most explosive success stories. In this case, lump sum investment seems to be a much wiser choice than DCA.

Such questions bring us to Eric and his live event tomorrow, the Road to the AGI Summit at 1 PM ET. You can automatically sign up by clicking here.

Eric will discuss what’s next for AI itself – its technology and capabilities. But there is also the investment angle. And not just the obvious companies you’re probably thinking of today (which might have higher valuations). Eric focused on alternative ideas, some with no apparent connection to artificial intelligence, all (still worth your consideration). You will hear more tomorrow.

Plus, when you join the event, you’ll receive Eric’s three-part “future-proof” plan, as well as a brand new stock idea for The road to AGI that he will give for free.

We expect a massive turnout and are keeping up to date with registrations. So, to reserve your seat instantly, click here.

Going back to the top of today’s Digest…

Does your portfolio and market exposure today suggest that you are well-positioned for your long-term goals? Or did a shorter-term, emotion-based influence begin?

If it’s the latter, this is your wake-up call.

Remember what you want to achieve with your investments and make that your North Star.

After all, while “old Buffett” may be overweight cash today, I seriously doubt we’ll find the same position from “young Buffett.”

Have a good evening,

Jeff Remsburg