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Got Cash?

Ecclesiastes 10:19 (NKJV)

A feast is made for laughter, And wine makes merry; But money answers everything.

 

There has been a small flurry of posts off of James Montier’s piece on the virtues of cash.  I wrote a piece like it recently (not as comprehensive, but possessing brevity): Chasing Your Tail Risk.

Like gold, cash is special because it doesn’t do anything.  Even money market funds do nothing, or almost nothing.  It just sits there, waiting.  It waits for the day when the Fed is forced to raise rates because inflation is running faster, even though the economy is still underemployed.  It waits for the day when bond yields rise and stock prices fall, where there are good opportunities to use the cash.

Having cash on hand allowed my church to buy a building cheaply in March 2009, and allowed me to help rescue a friends business, as well as buy some cheap stocks.  The same was true for me in October 2002, when I fully deployed my cash into stocks.

Cash is flexibility.

Cash says, “I don’t know.”

Cash says, “I don’t care.”

Cash says, “I’m ready.”

When opportunities are numerous, I am more than willing to part with my cash.  But when yields are low, and valuations are high if profit margins mean-revert, I would rather have more of a cash buffer.

For my account, and client accounts, I did buy some stock last week.  If the weakness had persisted, I would have bought more.

I still have an above average amount of cash (for me).  I am waiting for opportunities to get better before I deploy it.






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Asset Allocation, Bonds, Macroeconomics, Personal Finance, Portfolio Management, Stocks, Value Investing | RSS 2.0 |

7 Responses to Got Cash?

  1. dhom says:

    Yes – buying tails is expensive. I suspect this is because most traders, and more generally most Americans, are overleveraged and in constant danger of becoming insolvent. So Americans buy lots of insurance of every time, including options. They know it’s overpriced, and they buy it anyway. Better to line an option seller’s pockets than to become insolvent.

    Option sellers are essentially selling solvency to option buyers. A smart seller is one who has a pile of cash. He’ll manage his risk to make sure he isn’t selling solvency he doesn’t actually have. Pity the poor soul who uses random-walk mathematics to make this determination.

  2. [...] Why you should always keep some cash on hand.  (The Reformed Broker, Aleph Blog) [...]

  3. k1 says:

    A question about holding cash these days, in particular cash swept into money market funds. I have seen some mentions that many money market funds have been buying commercial paper in exposed areas of the eurozone, and thus have significant exposure to contagion.

    First of all, do you think this is a valid concern, and second do you have any suggestions for evaluating one’s sweep funds for risk?

  4. moneygator says:

    David, where do u park your cash? where is the safest when market crash? (large amount of cash)
    When you said you have high % cash…what is the % if you don’t mind shareing. I understand everyone is different. I think it just give a reader a better understanding of where you stand on the risk and out look.

    PS…I have read u for many years, I have invest for a long time (more then 20 years). Thank you

    • My cash level is about 13%, my max is 20%, and min is 0%. Most of my cash is in money market funds, though a decent amount is in my new bond strategy — at present 50% foreign, 50% credit-exposed (high yield, preferred and emerging).

      One of my clients uses MINT. I reviewed it , and it doesn’t seem overly risky.

      Full disclosure: one client owns MINT

  5. RichL says:

    The focus on reducing tail risk means, at least to me, that risk-aversion is the flavor of the day, and that a larger than normal portion of risks that are on the books are already hedged. There also aren’t any of the obviously loony overpriced deals around now – like Archstone Smith in 2008- that shows the saps are rising.

    How does a market go down big time if people are focused on protection from same? The Montier article, to me, argues for market ennui, or a rise.

  6. cold.as.ice says:

    > For my account, and client accounts, I did buy some stock last week. If the weakness had persisted, I would have bought more.

    Thank you, from a client.

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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