Markets and the ability to time your entry  

Over the last 100 years, there have been multiple books written about the value of staying invested in the markets rather than looking to time the same. However, a student of human history and psychology will appreciate the fact that investors will continue to spend an appreciable amount of time talking about whether the next move in the markets is up or down. This article is not going to delve much into why you should not be having these discussions as I very well understand that the human brain does not work this way (it is not smart to fight against how we are wired).

Instead, I want to spend some time building a framework for how one must look at data when one spends time on managing cash and risk. I have typically seen two lines of thinking for investors to piggyback on – one revolving around following investing legends. For example : If Warren Buffett is raising cash, then he is forecasting a big bear market, is a common narrative I often hear in the markets.

So, it’s only appropriate to look at what the legend himself has been doing in recent times. Considering his investment track record and the size of funds he manages, it’s not very hard to put together the data today.

I came across a recent tweet which summarizes his history and what he has been doing (Fig 1 below)

Fig 1: Ownership of T-bills and paring down of Apple stake by Mr. Warren  

Source: Twitter Handle  

Of course, reading and interpreting a chart like this, I believe, does not need too much skill. It would not require much to conclude how one should position themselves for reading this chart. In fact, I received a barrage of messages from well-respected investors post this, expressing worry  about the markets and thinking about raising cash significantly in their portfolios.

In an age of large numbers (due to a liquidity-driven environment), I have believed in not looking at absolute numbers as they never give you the full picture. Hence, it’s important to work on second-level thinking. The first thing we did was to look at what this means in %age terms as a part of  Mr. Warren’s portfolio and how this has changed over time (I can’t emphasize the value of studying history in investing).

Fig 2: History of % of cash balance in Mr. Warren’s portfolio (since 1996 to today)

As one can see from the above, the number of 21% is in the median end of the range. So it makes you wonder, why does he need to own 21% in cash? It’s important to remember that Mr. Warren does not run a fund, but an insurance company. This means that he has certain liabilities that he needs to manage the risk for at any given time. Assume that this number is ~10-15%. This means that at any given time, him maintaining 21% is par for the course, and is not necessarily a high number.

More importantly, if one looks closely, he has gone up to 35% in liquid instruments in the past. Once was during 2004 and another was during the end of 2019. While his holding of the cash at the end of 2019 turned out well with the benefit of hindsight, he was fairly early in raising cash in 2004 as he continued to deploy capital between 2004-08. It’s important to appreciate that the legend of investing has had a 50-50 probability of ‘market timing.’

There are two key takeaways I want to leave the reader with. One, while the conversations around timing of markets will never go away, it’s important to appreciate that no one knows beyond a point.

Second, while we read data, it’s important to spend some time to put this together to understand the context. Else, in a world of deluge, the human mind will inherently take a backseat.

P.S: This is not written with the intent to communicate if the next move in the markets is up or down 😊

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