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high-net-worth investing

I've noted before that contrarianism is one of the hallmarks of successful high-net-worth (HNW) individuals. In my experience, the idea of "zigging" when the rest of the investment world is "zagging" seems to be hardwired into the HNW mind.

When you think about it, this makes sense. The vast majority of these people (80 per cent plus, in my experience) are business owners who earned their money by pursuing business ideas others thought were crazy, seeing opportunity where others only saw risk and not giving up when others threw in the towel.

One recent example of this contrarian streak: their cash allocations. At a time when U.S. markets are hitting all-time highs, many wealthy investors have been building cash in their portfolios.

Several well-known investors and hedge funds have been doing the same. Among them is Warren Buffett, whose Berkshire Hathaway holding company now sits on $72.7-billion (U.S.) of cash, which is approximately 21 per cent of its market value in cash as of June 30. This is not a new problem for Mr. Buffett – Berkshire owns several businesses that throw off massive amounts of cash. Even so, his reluctance to deploy his cash confirms many of my recent conversations with HNW investors, as well as discussions I've had with hedge fund and private equity managers, and several institutional investor colleagues. Why is the "smart money" building up cash?

Bargains hard to find

The simplest explanation: the absence of bargains. This is particularly true in the United States, where the S&P 500 is either fully valued or slightly overvalued, depending on your point of view. It's not that the wealthy are hitting the panic button. It's just that, like Mr. Buffett, they have a value bent, and, like the Oracle of Omaha, if the price isn't right, they won't buy. According to Mr. Buffett, this kind of inaction is actually the secret to investment success: "The trick is, when there is nothing to do, do nothing," he says.

Less appetite for speculation/risk-taking

Over the past several months, HNW investors are exiting speculative positions, becoming increasingly cautious about high-risk/high-return scenarios and making doubly sure before they commit to new opportunities. Again, this caution is part of their contrarian nature. As everyone else looks to add risk, HNW investors are looking to reduce it.

Harvesting gains

Last year, many HNW investors put money to work in severely beaten-down sectors: oil, gold/gold miners, and, among Canadian HNW investors, base commodities. Looking back, these were somewhat savvy easy calls – opportunities that required more stomach than brains.

Now that they've had solid runs from the respective bottoms, it's time to take money off the table. It's the same pattern Mr. Buffett has taken with several of the positions he took on during the 2008 crisis (GE, Goldman Sachs, Swiss Re). Plant the seed, let it grow and harvest.

Growing focus on private equity

Over the past several quarters, many HNW investors have trimmed back public equity allocations, even as they've raised allocations to private operating businesses or to private equity fund structures.

Again, there's a parallel with what Mr. Buffett has done over the past several years. While his public equity positions get a lot of press, buying complete businesses is where his real focus is.

Building a 'war chest'

One of the most significant lessons of the 2008 downturn was the importance of having cash on hand to seize opportunities and to protect from the downside. I heard it time and again, particularly from HNW investors in the United States, who wished they had a bigger "war chest" when things got really cheap.

They are determined not to get caught this time. In this way, the wealthy are following Mr. Buffett's lead: In the aftermath of the bulk of the 2008 meltdown, he went on a buying spree, making shareholders billions by providing a financial backstop in a time of crisis.

Being greedy when others are fearful – over the years, this has been one of the most consistent wealth-building strategies I've seen from HNW investors. And it's only possible because they have a war chest beforehand.

Now may be the time to build yours.

Thane Stenner is portfolio manager and director of wealth management of StennerZohny Investment Partners+ within Richardson GMP. He is a founding member and chairman emeritus of TIGER 21 Canada and author of True Wealth.