In the current environment there appears to be a number of businesses where a 5 percent to 7 percent return is likely, but we do not see many where our hurdle rate of 10 percent to 14 percent seems likely or even probable. Because future returns on investments are a function of the prices paid for them, it is our obligation “to sit there with all that cash and do nothing.”
The likely short-term result of this approach will be to underperform our benchmarks as long as markets and associated valuations continue to rise at a rapid clip. We will remain patient and will continue to prepare ourselves to decisively deploy capital whenever prices fall enough. Fortunately, with our preference for concentrated positions, we only need for a couple of businesses that we like to get cheap.
Richard Cook and Dowe Bynum are co-founders of Birmingham, Alabama-based Cook & Bynum Capital Management, LLC and the co-portfolio managers of The Cook & Bynum Fund (COBYX). Including private accounts, the firm has $290 million in assets under management.