The Paradox of Money

Ready money is one of the most valuable asset in the world. Especially when the world is in turmoil. But because its so valuable, we want to make it grow. We want more of it. But only if you let it go (i.e. put into investments) that could grow. But then, it gets transformed from “ready money” to something not readily available.

How many times do we catch ourselves as investors when an opportunity comes around, and you don’t have cash available? My investment in FTDR is one. Where I should have hit a homerun only if I have dollars stashed and ready to take advantage of opportunities. I’m not complaining, I did took advantage of that opportunity, my only issue is that I should have been better prepared.

With these experiences adding up, not being ready for opportunities, you seem to get the point and learn from experience. You tend to save up cash for the next crash or the next big opportunity.

But then, it gets harder.

People around you would tell you, you are making a mistake keeping cash. What about inflation? Your money is sleeping. And that’s not all, it begins to be harder to actually not spend that cash piling up. Its a mental struggle.

It takes character to sit with all that cash and to do nothing.
I didn’t get to where I am by going after mediocre opportunities.

Charlie Munger

How many times do I want to imitate the great investors. Buffett with a huge pile of cash right now $150 Billion ready to be deployed. But I always find myself being cash poor. A long way to go, to be among the greats.

But is it bad to be cash poor but asset rich? I don’t think so. I think its just a phase in an investors life where he have more ideas than money. And along the way, as he gets wiser, the ideas become scarce with the money increasing. This was how Buffett started. He was always fully invested and running out of cash. So he reached out to friends and family and convinced them to invest with him. He also realized the power of having cashflow, so he acquired insurance companies where he can invest the money before they were claimed and all other businesses that just gush out cash.

My point, you can pick the most undervalued stocks there is, but it won’t amount to anything if you don’t put a majority of your cash into it. Cash is what makes a difference in investing returns and how much you back up an idea with your own conviction with the same amount of cash. Cash is king. But it takes hard work to just pile up cash. It takes discipline to accumulate it, and courage to invest it with conviction.

An interview with Mohnish Pabrai brings light to treating cash as an option.

Harris: Do you still use Berkshire shares in place of cash in your fund’s portfolio? Why or why not?

Pabrai: No. I used to do that a while back. In hindsight, I realized that was not a good idea. The idea was: to use [Berkshire] as a placeholder while you don’t have anything interesting to invest in. One of the pitfalls of doing that was that in the case of major market corrections, everything goes down, including Berkshire. It may not go down as much, but it will go down. So I think that my take is that it’s probably best to leave cash as cash so that you have the complete freedom and optionality to put it to work when opportunities show up. If I put it into something like Berkshire, I may be looking at a loss right at the time I need those funds for more opportunities. I haven’t done that for a while, and I think that it was a mistake to do it.

So then we know that cash is king. How much cash do we keep? Surely, we can’t keep too many cash that it would be detrimental for our investment returns, but not too little that opportunities won’t mean anything using the little cash that you have saved up.

So I guess its a personal preference. I am still struggling with this idea. How much cash should you keep safe for the rainy day, for the crash and for the once in a lifetime opportunities? I’d like to know your thoughts. Let me know in the comments below.