Increasing valuations due to low interest rates, rather than growth in economic value, has been the culprit in the S&P500, almost tripling since its low point in March 2009. Warren Buffett has said if interest rates remain low for many years then there’s plenty of room for the market to increase. But all things being equal, the only way an investor can justify paying increasingly high prices for stocks is to accept lower returns, which is risky. Fee-paying investors get frustrated when a fund manager holds large amounts of cash, often suggesting to allocate it to existing ideas. Unfortunately this increases the risk of poor stock selection and produces unnecessarily high concentration risk. In a world of low returns, too often investors focus on the opportunities available today, rather than thinking of how many wonderful opportunities there will be over the long term. Giving up those opportunities can be a massive opportunity cost. Remember it was only a few years ago when bargains were plentiful as the European economy looked like it was falling apart. Read more: (VIEW LINK)
Great read. I love that Klarman piece about cash - always wanted to read Margin of Safety but I don't want to re-mortgage the house to get a copy.