Whitney Tilson Has Only Been This Bearish At The Peak Of The Internet And Housing Bubbles

About: SPDR S&P 500 Trust ETF (SPY)
by: Superinvestor Bulletin

Hedge Fund manager Whitney Tilson posted a series of articles here at Seeking Alpha correctly warning investors about the dangers the housing bubble presented.

Today he has his portfolio positioned extremely cautiously and is taking little market exposure.

The last two times he was positioned this way were at the peaks of the internet and housing bubbles. I think investors would be wise to consider his warning today.

I pay very close attention to what the top hedge fund investors in the world are saying (and, more importantly, doing) because it helps me find better investment ideas and steer my portfolio away from serious risk.

Whitney Tilson is an investor I pay attention to. I actually think that Tilson does something similar to what I do: He is willing to pay attention to and borrow ideas from other top investors.

Source: Business Insider

That isn't a criticism of Tilson; it is a compliment. His job is to make the most money possible for his investors as safely as he possibly can.

Whether his ideas are borrowed from others or are original shouldn't matter. There are no style points in this business — all that matters are results.

In early 2008 Tilson told us through Seeking Alpha that there was major trouble coming in the housing market. You can read these articles here, here and here.

Consider how much better prepared investors could have been had they paid attention to this warning from his Seeking Alpha article on March 8, 2008:

In summary, today we are only seeing the tip of the iceberg: an enormous wave of defaults, foreclosures and auctions is just beginning to hit the United States. We believe it will get so bad that large-scale federal government intervention is likely.

This was March 2008 and there weren't many people who were calling for things to get as bad as they did. Tilson was one of them and he profited from being positioned correctly in advance of the really big blow-up in the fall of that year.

Listening to Tilson in 2008 could have saved investors a lot of money, or even allowed you to profit from the financial world imploding.

He Has Only Been This Bearish Twice Before

Tilson just presented at the Robin Hood Investor Conference. There he revealed that only twice before in his career as a hedge fund manager has he been positioned this cautiously.

The other two times that he has been this cautious were at the peak of the internet and housing bubbles.

Are you listening? He was exactly correct with his cautious positioning those two times. Why in the world would you not at least consider what he is saying today?

In his presentation, he points to three reasons for this conservative positioning.

  1. His bottom-up analysis is yielding very few decent long ideas but many interesting short ideas.
  2. His top-down analysis shows that valuations are high and investors are complacent considering the amount of uncertainty in the world today.
  3. He expects volatility will pick up and that better opportunities will arrive in the future.

If you have been reading our articles here at the Superinvestor Bulletin, or our instablog, you will be aware that Tilson is far from the only great investor concerned about the market today.

I think that given his track record in correctly getting cautious at the correct time means that we should listen closely to what Tilson is saying today. The fact that other really good investors are saying the exact same thing should really have our attention.

As we have numerous times in recent months, Tilson points to the fact that the market is at all-time highs and that the valuation of the stock market is quite rich.

Source: Whitney Tilson Robin Hood Presentation

The basic point that I would urge investors to consider is that while I don't think there is anyone suggesting that a market collapse is imminent, it clearly is not a table pounding time to buy.

Source: Tilson Robin Hood Presentation

So What Is An Investor To Do?

The market is expensive and investors like Tilson are positioned cautiously. The last two times he was positioned this way he was exactly right to have done so. What then is an investor to do?

How about nothing?

There is nothing wrong with letting cash build up for a while. While we don't know when the next great opportunity might come around it usually arrives sooner than you think.

There is nothing sweeter than sitting on a big cash war chest and then being one of the few investors positioned to pounce when opportunity arrives.

What I would most definitely recommend is to take a pause from putting new money into an S&P 500 index fund (NYSEARCA:SPY) or at least greatly reduce any amounts you are regularly committing.

SPY Chart

SPY data by YCharts

There will be better places for that money sooner than we might currently anticipate. It is really hard to be patient, especially when the market seems to want to go up forever.

The past would tell us that this is exactly when we should be patient.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.