Protecting against possible trouble...

Over the past year the market has had a hell of a run. The average market returns are around 8-9%, but in the past year the US Market has gone up 22%, while the total world index is up 15%. The average market earnings multiple is 23.4, and currently is at 28.8. There is no question that the market appears overvalued. But the high PE Ratio should be taken with a grain of salt. Interestingly in June 2009, the market's PE Ratio was around 50, and yet this was near the bottom of the bear market and proved to be a great time to buy stocks. Warren Buffett's Berkshire Hathaway has recently declared that it has built up its largest cash position ever, selling off a lot of his stake in Apple, Bank of America and Occidental Petroleum. Its cash pile is sitting at $334B.

However, Buffett reiterated in the recent Annual letter that the company will always prefer equities over cash-equivalent investments. In fact, Berkshire is increasing its investments in various Japanese companies. I think that it was perhaps a mistake in retrospect that I brought Infratil in early January. I wrote about it before I made the purchase. What I had thought is that I could buy half then and the other half later in the year. And I may still do this. But I have seen that my other favourite NZX stock to buy, Summerset, has gone from $13 to $12. I wrote about Summerset in the last article, and they are a very good retirement village operator with a large land bank.

Jim Cramer often talks about how you should only have 10 or so stocks in your portfolio. Excluding my index holdings, I have a bit more than this. But I recognized the other day, when Spark had a big fall of 20%, why he often says that diversification is the only free lunch in investing. It is a general rule that you shouldn't have more than 5% of your portfolio invested in any one stock, so as not to be overly exposed to individual stock risk. If I were to buy more Infratil I wouldn't get to 5%, but I would have a significant holding in them. They recently increased their investment in CDC Data Centres, which I identified as their best investment. With Trump in power in the US now, their renewable energy investments in the US are at possible risk of devaluation. But the flip side to look at this is through a simple supply/demand paradigm. Trump will increase fossil fuel investments while decreasing renewable energy investments, which will mean that the supply will go up for fossil fuels while going down for renewable energy. Decreased supply leads to a higher price equilibrium. So Trump could actually be a positive for existing renewable energy providers.

Anyway, the question here is whether I should hold onto my cash. which is at 15% of my portfolio, or whether I should take advantage of recent weakness and buy more Infratil or start a position in Summerset? I think it is too recent after my last purchase (2 months ago) to go and buy more stock right now. The market could fall some more. A good decision I have recently made is to buy Berkshire, which have had a nice rise today after they disclosed their high cash position. So I will continue to investment more into BRK.b. As for the rest of my cash, I will hold onto it for now.