I would like to add one more idea to my piece, Conservation of Liquidity, under most Conditions.? This is the concept of an asset-liability liquidity mismatch.? When absolute return managers like Buffett, Klarman, etc. start building up cash, the market should get a little nervous.? They don’t commit capital unless they can meet certain return targets.? When they aren’t investing, it means the markets are likely overvalued.

Think about it: long-term investors accumulating cash.? They are mismatching short with respect to time, and long with respect to liquidity.? Since the world in aggregate is always matched, who is mismatched long with respect to time, and short with respect to liquidity?? I can’t say for certain, but I would look at hedge funds and mutual funds that have to justify their existence quarter-by-quarter.? When they are fully invested, it is a time to be cautious, because a downturn in the market could turn them into motivated sellers.

And so, be wary when valuation-sensitive investors pull back.? It is not a good sign for the markets.