By Tom Bradley

"Bradley says nobody can call the market in the short term, but here he is with 15% of the fund sitting in cash. Isn’t that market timing?”

With cash earning next to nothing and stock markets going up, we’ve been getting a few comments like this about the Founders Fund. That means it’s time for further explanation.

First of all, we are not believers in market timing. We have views on the markets, and they may lead us to make adjustments to the Founders Fund, but we don’t consider this to be market timing. We position the fund to be mostly invested in assets that are attractive over the next 5+ years and minimally invested in assets that we believe to be expensive. We would be timing the market if we didn’t act on our fundamental and valuation work in hopes of doing it at a better time.

In Howard Marks’ wonderful book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor, he says, “… Our disinterest in market timing means – above all else – that if we find something attractive, we never say, “It’s cheap today, but we think it’ll be cheaper in six months, so we’ll wait.” We don’t know when markets will reward cheap and punish expensive, so we base our allocations on what we (mostly our fund managers and a little me) believe the securities will be worth in the long term.

So, what about cash? The Founders Fund has way more than usual. Is it good value? The answer is no – safety is extremely expensive right now. But unfortunately, the alternatives are not cheap either and they carry a higher risk profile. Real bond yields are approaching zero again (i.e. no return after inflation) and stocks are trading at the high end of their valuation range. Neither asset class has any ‘On Sale’ signs right now.

We’re taking advantage of cash’s positive attributes – little downside risk and instant liquidity - at a time when debt levels are high, the economy is being heavily tampered with by central bankers, and investors are getting complacent about risk … again. The factors that fueled growth over the last two decades (debt and overspending) will undoubtedly reverse and serve to moderate economic activity and profit growth.

I don’t sleep well when my cash is over 10% (indeed, my friend, mentor and former boss, Bob Hager, used to give me hell when my pension portfolios were over 2% cash). But sometimes the best moves are the hard ones (Bob said that too). I don’t think a 10-20% cash cushion is excessive at a time when we’re going through a grand economic experiment and all my valuation and investor sentiment measures are pointing towards caution. It’s time to be patient. Sleep be damned.