Charles de Vaulx on IVA funds call, below in an excerpt followed by the full transcript. Also check out his presentation at the Value Investing Congress yesterday.
Charles de Vaulx on International Value Advisers, LLC IVA Funds Update Call September 10, 2013
So why are we so defensive? It seems to us that many bonds and many stocks around the world are priced for perfection. In many ways, that would seem very rational and logical as stocks do not have to be cheap to compete against cash or bonds that offer such low yields. A combination of tepid economic growth, record-high corporate profit margins, and ultra-low interest rates seem to be a wonderful recipe for what we have dubbed “rational exuberance.”
While there is no law of gravity that says that financial assets that are priced for perfection are bound to eventually go down in price, we would feel very queasy being fully invested today in such financial assets. While we loathe the idea of holding cash when it yields less than zero after inflation, we’d rather own some than hold on to overpriced securities that indeed may go down in price. We also try to remember that cash that yields so little may one day be the ammunition, the dry powder that hopefully will allow us to pounce once genuine investment opportunities resurface as we believe they are bound to at some point.
Some of you may think of Chuck and me as very cautious types. Rest assured that at the right price, Chuck and I are willing to get exceedingly greedy and we will be ready to pounce if those times ever happen.
One last point on cash. Many advisors have rediscovered in May and June how risky and unsafe bonds can be, including Treasury bonds, once they become overvalued. And many now recognize that cash may in fact be the safest asset class. I like the way James Montier from GMO recently put it, “holding cash has the advantage that as it moves to fair value, it does not impair your capital at all.”