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and, yes, owning too many stocks.42 Sitting on cash is better than doing “something dumb

For a value investor who invests in companies one by one, what happens when prices are universally so high that they cannot find value, not even a few good companies selling at discounts to intrinsic value? Happily for our study, if not for some of these funds, the beginning of 2004 was just such a period. In the year-end 2003 report of Longleaf Partners, Mason Hawkins described an intensifying struggle – “little or no margin of safety exists in the prices of those

businesses that meet our qualitative criteria.”43 much the same.44

Tweedy Browne and Oakmark Select were saying

Some of the funds were holding very large amounts of cash. In March 2000, even while the market generally was peaking, the presidents of First Eagle Global had cheerily noted that “so many stocks [were] below their ‘intrinsic’ value.”45 Now, four years later, First Eagle Global was 22% in cash or equivalents, and the Clipper and FPA Capital funds were 32% and 37%, respectively. Not because they were predicting a market decline, but simply because they couldn’t find anything cheap.46 The yield on Treasuries was pitifully small, but it was better than doing “something dumb.”47 As Seth Klarman of the Baupost Group said in the year-end 2003 letter to his investors, his hedge funds were heavily invested in cash solely as a “result of a bottom-up [and failed] search for bargains.”48 (Ital added)

It’s nothing new, of course. In 1987, as stocks soared in the months before the Crash, many Graham-and-Dodders were doing just the same thing, holding fistfuls of Treasury bills.49

(b) Low portfolio turnover According to Morningstar, the average domestic equity fund held its stocks in 2003 for an average of ten months, equivalent to a turnover ratio of 121%, thus incurring huge though unstated trading costs and commissions.50 Of course, at a fund that likes to “back up the truck” from time to time, the

turnover will be far less. Our group had average turnover in 2003 of only 20%, meaning that they were holding their stocks on average for five



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