In one sentence: A listener fears that sitting in cash between great buys will drag down his compound return; Phil shows with simple arithmetic that a high return on a short holding still beats the market's average, and that Buffett's own cash pile is a useful signal for when to wait.
Key ideas
- The question. Eddie asks how holding cash between investments affects the annual compound return, and whether the strategy still works if he is in cash half the time. Danielle: the steady "15% a year" story assumes you never take money out; real life has cash periods. [01:00–03:30]
- Cash does lower the rate, and it still can win. Phil's example: $100 becomes $200 in four years, then four idle years in cash gives about 9% a year over eight years (roughly the long-run market average he quotes). If the first four years instead give two doubles ($100 to $400, about 30% a year), eight years including the idle half still gives about 19% a year. High returns on a short hold leave a lot of room to sit out. [04:00–09:00]
- Count the idle years. Judge the return over the whole period, including the time you weren't fully invested. [09:00–10:30]
- The market whipsaws. Staying invested needs fortitude through 50% drops (2000–03 and 2007–09 are his examples). Anyone who knows only the last ten years thinks stocks simply go up about 13% a year. [10:30–12:00]
- A worked comparison from August 2007. Staying fully in the S&P 500 from 1,474 to about 3,110 turns $100,000 into about $211,000, roughly 7.4% a year without dividends (Phil's figures). Selling at 1,474 and buying back at about 756 in early 2009, after about 18 months in cash, would give about $400,000, roughly 15% a year. It is a hindsight example and he says he is not claiming perfect timing; the point is that an average cash stretch can be survivable. [12:00–17:00]
- Two kinds of waiting. Danielle notes Eddie's cash stretch is while prices keep rising, which is the hard one, versus waiting while prices fall. Phil: the alternative is momentum trading (paying up because prices will be higher tomorrow), which is what most professionals do and not the Rule #1 game. [17:00–19:30]
- Use Buffett's cash as a guide. Berkshire's cash pile tends to double before trouble and fall fast when Buffett finds bargains: a few billion in 1997, about $18 billion by 1999, down to a few billion by 2001; up to about $45 billion by 2007, then spent; rising again to about $140 billion by late 2019. Phil's numbers are from memory, so check the annual reports. He adds that the wait can be two to four years. [19:30–26:00]
- Costs of the two errors. Missing another 18% of gains is a pain, but nothing like losing 60 to 70% of retirement savings. People who sell after a crash do the wrong thing at the wrong time. [26:00–28:00]
- Value investing makes cash normal. Danielle: when you focus on one company's value and price you can ignore macro noise, and a crash becomes a chance to buy more of what you already understand. Phil: something is on sale every day, but much of it is outside your small circle, which widens as you learn. [28:00–31:30]
- Munger's view. You make money while you wait, whether in cash or in a company, because action is what costs you. Short term the market is a voting machine and long term a weighing machine. [31:30–33:00]
- Follow-up. The Schwab/TD Ameritrade price contest from 242 continues, and entries need the reasoning shown, not just a number. [33:00–35:00]
How it maps to RuleOne
- The screen already shows nothing to buy when nothing is cheap; holding cash is the expected output, not a failure. A watchlist at /stocks/ built in quiet times is the "ready list" Phil describes.
- Berkshire's cash is public in its quarterly and annual reports, and can be tracked by hand; there is no agent for it yet and no real link to the screen.
- The 13F tracking from 001 shows Berkshire's buys, which tells you when Buffett is spending again.
Buffett, Munger and Graham links
- Graham's Mr. Market (The Intelligent Investor, ch. 8) is the voting machine versus weighing machine idea, which Buffett attributes to Graham.
- Munger's "sit on your ass" investing (Daily Journal annual meetings and Poor Charlie's Almanack) fits the idea that patience, not action, earns the money.
- Buffett's 1999–2000 letters and his later comments on being greedy when others are fearful are the background to reading his cash; the claim that it doubles before a fall is Phil's pattern, not Buffett's rule.
Words to know
- Compound annual growth rate (CAGR): the steady yearly rate that gets you from the start value to the end value.
- Momentum investing: buying because prices are rising and expected to keep rising.
- Whipsaw: sharp moves up and down that punish people who trade on them.
Try this
Redo Phil's sums yourself: what yearly rate turns $100 into $250 over five years of holding plus five idle years? Then open / and see how many names on the screen are at a real discount today; how long could you wait if the answer is "few"?
Check yourself
- $100 doubles twice in four years, then sits in cash four more years. Roughly what is the eight-year compound rate?
Answer
About 19% a year, since $100 becomes $400 over eight years. - Why is a long wait for bargains less costly than the alternative in Phil's view?
Answer
Missing gains is painful, but a 60 to 70% crash loss near retirement is far worse and may take many years to recover. - What does Phil watch at Berkshire as a market signal?
Answer
The size of its cash pile; when it roughly doubles to new highs, bargains are scarce, and when it falls fast, Buffett is buying.
Short quotes
"It's action that costs you the money." (Phil, ~31:30, auto-transcribed)