There is a good piece in a must-read book “The Investor’s Dilemma”, by Louis Lowenstein .
“Sitting on cash is better than doing something dumb. For value investors who invest in companies one by one, what happens when prices are so high that they cannot find value-not even a few good companies selling at decent discounts to intrinsic value? Happily for our study; if not for some of these funds, the beginning of 2004 was just such a period. In the year-end 2003 report of Longleaf Partners, Mason Hawkins described an intensifying struggle, because “little or no margin of safety exists in the prices of those businesses that meet our qualitative criteria.” Others were saying much the same thing.
Some of the funds were holding very large amounts of cash. Back in March 2000, even while the market generally was peaking, the presidents of First Eagle Global had cheerily noted that “so many stocks [were] below their ‘intrinsic’ value.” Four years later, First Eagle Global was 22 percent in cash or equivalents, and the Clipper and FPA Capital funds were 32 percent and 37 percent in cash, respectively. The increased cash holdings were not due to any predictions of a market decline, but because they couldn’t find anything cheap and worth buying. The yield on Treasuries was pitifully small, but it was better than doing “something dumb.” As Seth Klarman of the Baupost Group said in the year-end 2003 letter to his investors, his (value-oriented) hedge funds were heavily invested in cash solely as a “result of a bottom-up [and failed] search for bargains.”(Italics added)
This state of affairs among value managers is nothing new, of course. In 1987, as stocks soared in the months before the October crash, many Graham-and-Dodders were doing precisely the same thing: not finding good companies at reasonable prices, they held fistfuls of Treasury bills.”