In the first part of this irregular series, I tried to point out the value of having some slack assets should attractive opportunities present themselves.
I try to raise cash in my equity strategy as valuations rise. I try to reduce cash as valuations fall. It doesn’t work perfectly, but I do think it reduces risk, and it might improve returns.
Buffett also views cash as valuable. He views it as a call option on other assets, as is noted in these two articles. With cash, your downside is limited — you can just sit and wait for a good opportunity. In one sense, if you wait too long, the opportunity cost of cash could be significant, but over most 5-year periods there is a drawdown in asset prices that avail good opportunities.
Cash gives you options, perhaps not options in the same sense as “puts and calls,” but options in the sense of choices that are easily achieved. Particularly for Buffett, who is the choice of many who want to exit their private business, and want their culture/friends to survive, rather than receiving top dollar as a sales price.
Even as the Fed tries to make cash less attractive to hold, it is still valuable to those that prize flexibility. That is the virtue of cash, and it is impossible to erase.