Why this value investor holds cash in a rising market
Found via The Corner of Berkshire & Fairfax.
The Canadian stock market is more vulnerable to a major pullback than its U.S. counterpart, warns one of Canada’s more successful money managers of the past decade.
“We think that valuations in Canada, in particular, are at a very dangerous level,” said Vito Maida, founder of Toronto-based investment firm Patient Capital Management Inc. “Equities in Canada have, I think, gone to levels that are not attractive today, and could be in for a serious correction.”
The probability of a market downturn “in the next 12 months is high,” but the timing is hard to predict, said the 51-year-old investor. “These things can go on for some time. …We think the commodity boom has gotten to excess. I would use the word frothy.”
The market is “not [yet] at extreme bubble peaks,” but it is “absolutely possible” to retest the market lows of March, 2009, said Mr. Maida, whose portfolio managed to gain 4.5 per cent before fees in 2008, even as global stock markets were crashing. “We are probably close to or slightly above the valuations that existed in 2007 and 2008 before the crash.”
While he believes the U.S. market, where he is now mostly invested, is less worrisome than Canada’s, he is cautious on North American markets in general. “If you look at the long-term average dividend yield of the S&P 500 Index, it is closer to 3.5 to 4 per cent,” he said. “Today, the yield is under 2 per cent. That tells us that the aggregate markets are overvalued by a substantial degree.”
Mr. Maida, who oversees $125-million in assets, has raised cash levels to 55 per cent in the portfolio he runs for wealthy individuals and foundations.
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