In his 2002 Berkshire Hathaway Annual Letter, Warren Buffett explains how they are willing to wait on the sidelines for opportunities with at least a 10% pre-tax return potential, even though holding cash offers low returns. He acknowledges the discomfort of this approach, but believes it’s necessary for successful long-term investing.

Here’s an excerpt from the letter:

We continue to do little in equities. Charlie and I are increasingly comfortable with our holdings in Berkshire’s major investees because most of them have increased their earnings while their valuations have decreased. But we are not inclined to add to them. Though these enterprises have good prospects, we don’t yet believe their shares are undervalued.

In our view, the same conclusion fits stocks generally. Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge.

The aversion to equities that Charlie and I exhibit today is far from congenital. We love owning common stocks — if they can be purchased at attractive prices. In my 61 years of investing, 50 or so years have offered that kind of opportunity.

There will be years like that again. Unless, however, we see a very high probability of at least 10% pre-tax returns (which translate to 6½-7% after corporate tax), we will sit on the sidelines.

With short-term money returning less than 1% after-tax, sitting it out is no fun. But occasionally successful investing requires inactivity.

You can read the entire letter here:

Berkshire Hathaway 2002 Annual Letter