Understanding When Cash Is King

cash is king, hundred dollar bill, cash as an asset, moneyBy Ross Heart
If I were constrained to only one pearl of investing wisdom I’d have to select legendary trader Jesse Livermore’s line: “It never was my thinking that made the big money for me. It always was my sitting.” This coming courtesy of favorite and must-read Reminiscences of a Stock Operator.

Even Livermore himself would have found “sitting” frustrating and troublesome in today’s environment, especially as it relates to cash. Combine today’s ZIRP (zero interest rate policy) with a hyper-connected, always on, impatient, media-dominated world firing ideas at you with a firehose and it’s very easy for investors to forget: Cash is an asset class and inactivity is a strategy.

You do not actually have to trade. You can choose to deliberately park money in cash. Yes, you can even “sit” in that cash for an extended period of time. And, yes you will likely be ridiculed by those fully invested, told you are missing the boat, warned you are not keeping pace with inflation, et al. Of course, a majority of this is derived from industries dependent on your constant and stable investment, but that’s a story for a different day.

Last quarter, our investment management practice held an outsized cash position in a majority of accounts we manage. These 0% earning portions of accounts are deliberate decisions to have reserves to deploy when targeted stocks descend to attractive levels. Just because Ben Bernanke has emptied his gun doesn’t mean you have to.

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Perhaps more important than waiting for buying opportunities, utilizing cash as a parking spot doesn’t torture your investment psyche during ups and downs, and can act as a sanctuary where you can build emotional reserves to be psychologically strong when you most need to be.

This is not a “call” on the markets nor is it advice on how to currently asset allocate. It is purely a reminder that cash (despite ZIRP) can still be a vital component of an overall investment strategy despite an all-out assault on it by the Federal Reserve. It is a reminder of lessons learned in 2000 and 2008 that pretty pie-charts extolling asset allocation as a financial Holy Grail fail miserably in rapidly declining markets as all assets seem to correlate when diversification is most needed. Cash can give you that non-correlation, a store of value, and the energy to fight when you should be the one landing punches instead of being the punching bag.

** My next post will extol the benefits of how Livermore’s “sitting” relates to taking stock positions and how inactivity can aid an investment process. **

Heart Capital does not offer investment advice via this medium. Under no circumstance whatsoever do these postings, opinions, charts, or any other information represent a recommendation or personalized investment, tax, or financial planning advice.


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Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.