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.
Keeping money in cash is not just about optionality these days. Yield has virtually been driven off the face of the map by the Fed( please forgive the hyperbole but the statement feels more true than false) so why bother to take any risk, duration or credit if one is not going to be compensated for taking it. Lending someone at few basis points amounts to giving away a suit case full of cash and getting it back in a few years, if I’m not getting significantly more cash back, then not much point.
Hi. I am sure that you have gone over this plenty of times in the past, but can you recommend a few options in terms of how to hold cash, other than in a bank account, for those of us who are interested in safety first? Thanks in avdvance.
hi David, i read the article on Buffett and how he sees cash. Thats a good way to frame newbie investors.
alternatively, i hope that you can enlighten me on something.
i am seeing some perpetual bonds issuing at 8% yields by french and uk insurers.
the latest have been CNP Assurance 8% perpetual bonds reseting every 6 years. i thought thats a good term but as i know every investment has its risks for the kind of reward.
perpetuals tend to be very sensitive to interest rates, but i would like to find out normally under what circum stances will they issue bonds or preference like this?
best regards.