Warren Buffett Is Once Again Doing The Opposite Of The Crowd

by: ETFguide

By Ronald Delegge

The disdain for cash is nearly universal. Cash instruments like money market funds are yielding around 0%. And nobody needs or wants cash because stocks are up. The S&P 500 just rallied 3.8% in August, almost one-third its year-to-date (YTD) gain of 9.73%.

Performing even better than the broader U.S. stock market, are industry sectors like biotech, energy, and REITs which have all gained between 13% to 21% YTD. As stocks are hitting record highs, the level of cash held by Wall Street's mutual fund managers is hitting record lows.

Mutual fund cash liquidity or the amount of money that fund managers keep in reserve hit just 3% of assets in June, according to Ned Davis Research (NDR). Not that anyone is paying attention, but that's lower than previous market tops in 2000 and 2007.

Click to enlarge

What about individual investors? Are they mimicking the same pattern?

In its July survey, the American Association of Individual Investors showed that individuals reduced cash in their portfolios to 15.8%, which is a 14-year low. The fully invested mind-set appears to be in full bloom.

This same behavior is confirmed by NDR data which again shows that investors' asset mix in cash oriented mutual funds is at record lows near 18.3%, while ownership of equity (60.1%) and bond funds (21.7%) are in front.

Instead of following the crowd, billionaire Warren Buffett has been increasing his exposure to cash. The cash stockpile at Berkshire Hathaway (NYSE:BRK.B) is up more than 50% year-over-year to $55 billion.

Although Buffett is not by definition a "market timer," the precision of his best investment payoffs (see his $5 billion deal with Goldman Sachs (NYSE:GS) in 2008) has been routinely good. It's also not coincidental that Buffett's cash hoard has helped him to make these kinds of opportunistic moves when others are running scared.

Contrary to popular views, cash has held up during both inflationary and deflationary cycles. During the 1970s period of inflation, cash performed slightly worse than stocks but better than bonds. And during Japan's deflationary spiral that began in the early 1990s, cash performed better than stocks. Sentiment extremes like the consensus disgust toward cash are contrarian signals or warning signs.

Disclosure: No positions

Originally posted on ETFguide.com