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.

By Bill_Fleckenstein Oct 5, 2012 1:58PM

Close-up of Dollar bill © Steve Allen/Brand X/Getty ImagesLet'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.

Oct 20, 2012 4:34AM
He (Buffet) thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.

This is why the guy is a genuis - when did you last think of cash like that?
Oct 8, 2012 8:32AM
I learned a lesson a couple of years ago.  We had a power outage in our town, so, all transactions were cash only at local stores.  In some cases exact amounts were required.  I now keep a stash of small change and large cash.  You never know when you might need some bread, milk, & eggs or even a generator.
Oct 8, 2012 12:02AM
Years ago, I used to read your columns and thought you were absolutely crazy.  My teck stocks were flying at the time and you were preaching doom and gloom.  You irritated me.  Well, the market collapsed and I lost a lot of money and it took my forever to get most of it back.  I quickly learned a very important lesson.  Now I LOOK for your column and read every word.  Thank you for the lessons.
Oct 6, 2012 7:47PM
I think that this was true in the past.  However, due to funny business by the Fed - and governments around the world - I'm not convinced that cash is safe.  What is a safe investment now?  Gold?  Even Buffett agrees that gold only has value since its "pretty."

Until markets are no longer manipulated, it is impossible to know what is any kind of a good medium-to-long-term investment.
Oct 6, 2012 2:14PM
Investments are an ATTEMPT at growing your overall net, cash is UNLIMITED POTENTIAL that could be dormant or in flux waiting to become an attempt at growing your overall net!
Oct 6, 2012 10:10AM
It not other than a game..the game is much over for us simpletons that do not invest in rhe "markets"...anyway.  The 401 Ks' and pension plans all that are just "churned'...this will not change as regulations are non-existent. If you think a presidential change will make any difference in need to get something else to "invest" in. 
Oct 6, 2012 9:23AM
It is always wise to have a cushion of good old greenbacks for the unknows unexpected unplanned bad luck times of life, not necessarily in gold but spendable cash. A wise man taught me that if you are lucky you will get old, and when you do the best friend you have is green and in your wallet. When you are no longer physcially able to do things yourself people ain't going to help you out of the goodness of their hearts but of their pocketbook.  Unfortunately too many have holes burned in the pocket as they cannot hold onto anything green, in this hand out the other. Banks well the interest in not worth mentioning but at least it will preserve the principle when things tank, old saying not all the eggs in one basket.
Oct 6, 2012 7:41AM
Funny, I had to push my financial advisor to raise cash. Simple philosophy. Make sure I have plenty of cash, especially at this time when fiscal cliff will lead us into another recession, presidential race is up in air, markets are outpacing economic growth, the bull will run out of gas, etc. Best money is made at bottom of recessions and we are "due" for another downturn or at least a market corrections. I want cash for values created.
Oct 6, 2012 5:10AM
Since I don't have a ton of cash like Warren. I guess that it's not a call option for me.  Gold is over priced and will remain that way for a little while. How can some one go to the kroger down the street and buy a loaf of bread with gold? They world economies are at a verge of hyper inflation. Money may soon be only good for starting fires.  My way of taking stock for the future is to have all base's covered. I heat my home with wood, have a garden, know how to hunt, understanding how to survive with neighbors.  Things may get very hard for all of us soon. Even the top 1%ers.
Oct 6, 2012 2:20AM

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.















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Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website,, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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