“Cash is king.” We have heard of this saying a long time ago and are often advised by our parents or families to keep more cash. However as an investor, I used to hate keeping cash because holding cash in the bank yields a meaningless return. But after experiencing the recent market cycle, I grew to appreciate setting cash aside more and more. Why?
Gautam Baid, the author of “The Joys Of Compounding”, sums it up well: ‘Cash is a call option on opportunity.’ Having ample liquid cash provides valuable optionality to investors, enabling them to make bargain purchases when opportunities arise and making them anti-fragile.
Having cash grants you peace of mind and the liberty to act when opportunities emerge. It makes your portfolio more antifragile.
As Gautam Baid said, “Cash is a much-underappreciated asset. It’s one of the only price-stable assets that is simultaneously highly value-elastic: cash increases in value as other asset prices drop. The more they drop, the more valuable cash becomes.”
I distinctly remember how much my portfolio dropped in the recent bear market and how much I wished to have more cash to act. Reflecting on that time, I realized that having more cash would have given me greater peace of mind and more courage to buy more.
It would have also resulted in better quality sleep and a higher portfolio return when the market was offering such a good margin of safety. Nevertheless, I am grateful that I weathered the crisis with quality businesses that have since greatly recovered.
Gautam Baid added, ‘A peaceful night’s sleep and assured survival are much more important than higher relative returns for one’s overall well-being.’
This sentiment aligns closely with Bogumil Baranowski’s advice on constructing a portfolio that allows for peace of mind, as discussed in our recent interview on my YouTube channel.
Constructing an anti-fragile portfolio to ensure a good quality of sleep is precisely what Buffett and Munger have been practicing for the past several decades.
“Charlie and I believe in operating with many redundant layers of liquidity and avoiding any obligation that could materially deplete our cash. This may reduce our returns in 99 out of 100 years, but we will survive in the 100th while many others fail. And we will sleep well in all 100.” — Warren Buffett
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