Drowning in a Sea of Cash

I’ve been reminded a few times this week of how little there is in the way of investment opportunity in the current marketplace, and that we are drowning in a sea of cash.

Recently I read an article about how Warren Buffett (or to be more specific, Buffett’s company Berkshire Hathaway), has $116 billion to spend.  Berkshire Hathaway got shut out of a few deals last year so their cash hoard has gotten bigger. A lot bigger. Buffett said part of the reason they got shut out of the two big deals they worked on last year was because interest rates are so low, the other suitors were able to borrow and offer a lot more than he and Charlie Munger were willing to spend. Buffett and Munger will use debt when called for, but always evaluate a deal on a cash basis first.

So on the big stage, the deals are harder and harder to find, and there’s clearly a lot more competition for them when they do eventually present themselves. What does this mean for people like you? Decent investment opportunities dry up like rain drops in Death Valley.

Stock prices have been higher only once before. Can you say party like it’s 1999?  I guess we might as well.

A lot of our clients invest in real estate, and more of our clients are headed that way as stock prices soar.  But now real estate prices (and property taxes) are skyrocketing too. Even in places that have never been hot markets before, hedge fund managers are deploying cash in amounts never seen before to buy up everything and anything they can in the search for yield.

In 2014 oil went from over $130 a barrel to under $40 a barrel, and the other commodities followed it off the cliff. So I told clients to emphasize commodities in their portfolios. Now even commodities are well off their lows and I’ve read about investment managers recommending them. Prices in this asset class are no where near those of the paper assets (stocks and bonds), but there’s still a sea of cash swishing around.

There is simply too much cash chasing too few investments.

I’m reading Mohamed El-Erian’s The Only Game in Town. In it, he staunchly defends decisions made by central banks, but cautions that they have been asked to do too much. (It’s a great book by the way.) I beat up on the Fed in this blog a fair bit, but I’ve also acknowledged that without their intervention in 2008/2009, we’d probably be in the depths of a global depression to this day. The problem is monetary stimulus has its limits, and without reformative economic policy, it’s limits will be seen.  Probably sooner than later. We’re drowning in a sea of cash right now.  Let’s hope it has a shred of value when the tide finally goes out.

So, you may be wondering: OK, what the heck do I do about it?  And you’d be wise to question this.

To be clear, buying assets at high prices just because markets are appreciating does not make good financial sense (not to me anyway, and not to Buffett and Munger, either, apparently). Sometimes accumulating cash, or its equivalents, makes good sense.

When I say there are high valuations everywhere you look, I’m generalizing. Obviously there are opportunities in every market, but at times like this, you have to be patient, very patient, and look long and hard to find them. When you do, there will be lots of competition for them, so having a pile of cash will help you to capitalize when you find yourself in the right place at the right time.

That said, be mindful of getting caught up in bidding wars if others sniff your deal out before you close on it. Also, if you have not allocated any of your long-term investment money to commodities and natural resources, there’s still time.  As an asset class, they have not been driven into la-la land, yet.  They say patience is a virtue. In the world of investing, it can make or break you.