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3 reasons investors should hold cash

As the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) approaches 5,000 points once again, having climbed 49% since the bottom of the Global Financial Crisis in May 2009, investors could do worse than heed the advice of some of the world’s greatest investors.

Bill Miller

Bill Miller who was a star portfolio manager at US-based Legg Mason (NYSE: LM) for many years once said:

“Great investors and not unemotional, but are inversely emotional – they get worried when the market is up and feel good when everyone is worried.”

Miller’s advice seems timely as we head in to the August reporting season. At the moment the stock market seems to “feel good” but with low expectations for earnings growth perhaps it would be more prudent for investors to “get worried”.

Howard Marks

Howard Marks is Chairman and Co-Founder of Oaktree Capital (NYSE: OAK) which has recently been in the news in relation to Billabong International (ASX: BBG). Marks is known to love a bargain; he also suggests that there are times when investors should be more cautious in their enthusiasm to invest:

“If you buy a cheap stock when the market is high, it is a challenge because, if the market being high is followed by a general decline in prices, then for you to make money in your cheap stock, you have to swim against the tide. If you buy when the market is low, and that lowness is going to be corrected by a general inflation, and you buy your cheap stock, then you have the tailwind in your favor…. I think it is unrealistic and maybe hubristic to say, ‘I don’t care about what is going on in the world. I know a cheap stock when I see one.’ If you don’t follow the pendulum and understand the cycle, then that implies that you always invest as much money as aggressively. That doesn’t make any sense to me. I have been around too long to think that a good investment is always equally good all the time regardless of the climate.”

Warren Buffett

The chairman of Berkshire Hathaway (NYSE: BRK.A) offers this advice, which is particularly relevant given how many companies look fully valued at present.

“Investors making purchases in an overheated market need to recognise that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.”

Foolish takeaway

Today with the market near 5,000, there are fewer enticing opportunities than there were a year ago when the index was closer to 4,000. There are of course opportunities should the market pull back during reporting season — then investors who have cash available will be better positioned to seize opportunities which spring up.

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Motley Fool contributor Tim McArthur owns a share in Billabong International.

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