maintenance
Cash is optionality
The rule
Cash is not dead weight. It is a stored ability to act when everything is cheap and everyone else is frozen.
Where it flips
This turns into an excuse when 'waiting for the crash' becomes years of sitting mostly in cash and missing the growth. The fix is to hold cash as a sized reserve for a real chance. Do not hold it as a permanent bet against the market.
Held cash looks like a drag, because it earns little while markets rise. But its real value shows up in a crash. Good assets go on sale, and the fully-invested cannot buy without first selling something else cheap. Cash buys you the freedom to act at the exact moment when acting pays the most, and is hardest to do.
A worked example
A reader keeps 15% in cash through a long rally, and frets over the 'lost' return. Then the market falls 30%. That ₹1,50,000 buys quality holdings at prices the fully-invested reader can only watch, unable to raise money without selling at the bottom. [illustrative]
How to spot it
- ·cash judged only by the return it 'misses' in a rally
- ·no reserve left to buy a real fall
- ·'waiting for the crash' stretching into years of doing nothing
- ·a reserve confused with a bet on market timing
Seth Klarman · Margin of Safety