When the federal funds rate is at almost zero level, the tide rises and a rising tide lifts all boats, junks, sampans, etc. But tides ebb and flow: when the federal funds rate rises, the tide ebbs. When it ebbs or goes out, we get to find out who is swimming naked. If that is so, there is a lot of ebbing for the tide to do and we suspect we will discover a lot of investors swimming naked in its wake. The Bank for International Settlements summed the prevailing situation aptly in its 85th Annual Report: “Monetary policy has been overburdened for far too long. It must be part of the answer but cannot be the whole answer. The unthinkable should not be allowed to become routine.” When there are investments yielding sufficient margin of safety, the cash assets of your portfolio will be deployed to invest. When it is right for the cash level to drop, it will drop. However, the relatively high cash holdings may temporarily affect the short-term performance of your Investment. In contrast, when there is skyrocket stock market. that is the time you pile your cash assets.
No one would deny that Warren Buffett is one of the greatest investors in the world. Even then, there will be periods when his returns will be sub-par. The charts below showed Berkshire Hathaway, has underperformed the S&P 500 over a 5 and 10-year periods. Judging his performance over a 5 or 10-year period would be very arbitrary and more importantly, it would not give an accurate picture of Warren Buffett’s superior longterm performance.
The key point here is that “investing with margin of safety”. And more importantly, “LONG TERM INVESTMENT”. Easy to know, difficult to practice.
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