In investing, cash means opportunity
One of the world's most successful investors doesn't mind holding cash, if the time and the price are right. You shouldn't either.
Let's talk about cash for a bit. Last week, the friend I refer to in my columns as the Lord of the Dark Matter pointed me toward the following comments by Alice Schroeder, a former insurance analyst and the author of the Warren Buffett biography "The Snowball." As reported in the Globe and Mail:
"Ms. Schroeder argues that to Mr. Buffett, cash is not just an asset class that is returning next to nothing. It is a call option that can be priced. When he thinks that option is cheap, relative to the ability of cash to buy assets, he is willing to put up with super-low interest rates, said Ms. Schroeder, who followed Mr. Buffett for years before she became his biographer . . . .
"'He thinks of cash differently than conventional investors,' Ms. Schroeder says. 'This is one of the most important things I learned from him: the opportunity of cash. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.'"
She concludes by stating:
"If investors would realize that what they are paying for is someone to have the expertise to know when to buy a call option called cash, and move in and out of that, then perhaps there might be more value placed on that service."
The idea that there is something wrong with parking your money in cash once in a while is one of my pet peeves. Only a fool would hire an expert and then tell him what to do, yet that happens continually in the investment business, where customers and consultants (who are often failed money managers) tell the actual money manager that he will be fired if he holds cash. It is an insane practice that has evolved in an insane era.
Speaking of insanity
I would next like to comment on a rather startling article by Andrew Ross Sorkin headlined, "More money than they know what to do with." In it, he makes the point that the world's leveraged buyout artists (they like to call themselves "private equity," but that is a silly misnomer), for various reasons relative to when they raise the money and their contracts, need to spend their money fairly quickly or (God forbid) return it to their investors.
That, of course, would mean not getting a management fee, nor any shot at carried interest. Thus, Sorkin suggests, there could be a frenzy of LBO activity in the not-too-distant future, and I can see how that might be the case. In addition to Sorkin's observations, the junk bond market now has no serious premium to speak of, which could also contribute to an episode of nutty takeover activity.
I hadn't really thought about this prior to reading the article, but it seems plausible. I'm not sure what the investment implications are, but it is yet another example of what happens when our currency has essentially been degraded to the status of Monopoly money.
Follow the yellow brick road
So, once again, all roads lead to gold to protect one's cash from debasement, which is still not a mainstream idea despite the number of smart people who think investors need to own it.
I mean, when was the last time you heard Jim Rogers, Marc Faber, Bill Gross, Felix Zulauf, Jim Grant, Stan Druckenmiller, Fred Hickey, David Einhorn, Kyle Bass and Ray Dalio all say the same thing? If they all agreed that people should own a specific stock, the order imbalance would be so large that the exchange wouldn't be able to open trading in it for a week!
At the time of publication, Bill Fleckenstein owned gold.
Cash Money Honey! Cash, food and precious metals are three of the four basic needs we should all be fortunate to have or be working to acquire.
I'll leave the fourth to your imagination.
This is why the guy is a genuis - when did you last think of cash like that?
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ABOUT BILL FLECKENSTEIN
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
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