You usually don't realize how good something is until it's gone. For most investors, the red-headed stepchild in their portfolios is cash. When markets are advancing, it's easy to see cash as a weak, underperforming asset that needs to be put to better use. After all, who wants sit on an asset earning low-single-digit returns when the markets are serving up double-digit gains? As a result, investments are made with less regard to the underlying fundamentals of the business.
Cash gets a bad rap
Believe it or not, it can be quite difficult to justify why you're holding cash. If someone asks you to name your favorite investment ideas and you say you're in cash, that's usually the end of the conversation. Folks would rather hear that you've discovered the next Google
As an investor, the general assumption is that you always have to be invested; holding cash suggests that you're not investing but rather sitting idle. Yet this assumption couldn't be more misguided. Cash is actually the investor's most valuable asset. Most don't see its true value, however, until there's a cash crunch in the economy.
Charlie Munger, chairman of Wesco Financial
Today, Munger's words almost seem prophetic.
Was anyone listening?
A few years back, no one wanted to hear about holding cash. Interest rates were low, and home prices were experiencing stock market-like gains, as were stocks themselves. The performance of cash was viewed as a losing bet amid all the "easy money."
As usual, Wall Street always seemed to think the party would never end. Yet when it did, companies and investors both found that they'd burned through a lot of money that they wished they could have back. Much of today's economic turmoil was ignited by the excessive leverage created by undisciplined lending practices. Adding fuel to the fire was the evaporation of liquidity.
The availability of cash enables the investor to avoid two pitfalls:
- Selling what's cheap so you can buy what's cheaper.
- Not having dry gunpowder to take advantage of compelling investments or special situations when they arise.
The big bad bear
Just how valuable is cash? Look no further than Bear Stearns
But last week's then-rumor that a bailout by JPMorgan Chase
Feast or famine
With fear and panic gripping the markets, those with cash will feast on the bargain pickings that the markets serve up. In contrast, those without cash will have to sit on the sidelines and watch opportunity pass them by. Now is not the time to let fear dictate your decision-making. If you use your cash wisely, the odds are very high that in a couple of years from now, you'll be sitting pretty.
Fool contributor Sham Gad is the managing partner of the Gad Partners Fund, a newly launched value-centric investment partnership very similar to the 1950s Buffett Partnership. He holds positions in Berkshire Hathaway. JPMorgan Chase is an Income Investor recommendation. The Motley Fool owns Class B shares of Berkshire Hathaway, which is a Stock Advisor pick. The intrinsic value of our disclosure policy is off the charts.
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