It is quite common to hear people mentioning that “Cash is king” especially during bad times such during a recession or a market crash. This is only half truth. Yes, during times of uncertainties, cash is king, but it is good only for that short time window. If it is not duly deployed, cash remains as cash and there is nothing that we can get out of it except for a paltry bank interest if we continue to put it in the bank. Therefore, cash is only a king when it is able to find its way in picking good-value investments that present themselves during those trying times.
Personally, I have met people on several occasions who told me that they were “heng” (lucky) because they did not invest in anything and therefore did not suffer any financial loss during a crisis or a stock meltdown. Their ‘investments’ did not go beyond some insurances that they have been paying. Frankly, I am not sure if they are really that “heng” if they have not been investing in anything at all. This means that all this while, they have not been making money work hard for them. In fact, it even occur to me that a person who rides through his investments without selling out during a major stock crises may be better off than another who rides through it holding cash alone. Of course, that is very dependent on the quality of the investments as some of them do not regain their previous shine after a crisis. However that is not the critical success factor. It is likely that a person who rides on his investments during a meltdown actively sniff for good investments that have been battered down as a result of the general pessimism than the one holding cash during those fearful times.
Here, the best lesson is to learn from the billionaires both locally and abroad. Most of these people know that they are unable to time the market as they have more important day-to-day things to do. During times when there were major meltdowns, they continued to hold their company shares. When a crisis was brewing for some time, they accumulated either their own company shares or bought into investments that had never been on discounts. Yes, for a short period of time, their wealth may be hit and it is not uncommon to read reports that their wealth has been decimated by 30-40%. However, once the crisis period is over, they become richer than they were before the crisis. Of course, one may argue that a billionaire would become a lot richer if he were to sell out everything just ahead of the crisis, and then bought back everything when the crisis happened. But that was hindsight. We only knew when events have gone passed us. There are always possibilities that a small setback would not turn into a major crisis. Furthermore, he cannot be seen to be jumping in and out of the market trading his own company shares, and this will not be positively viewed by the minority shareholders. A good example was the fall of Bear Stearns in March 2008. When it fell, nobody thought that it was a precursor to a global crisis six months later. Everyone probably thought it was an isolated bank crisis, and businesses were going on as usual. Otherwise, many people would have sold out everything and come back six to twelve months’ time to buy them all back. It was only when Lehman Brothers Bank fell exactly six months later during mid-September 2008 in a perfect storm leading to the downfall of a series of banks and financial institutions that everyone discovered that a crisis was already underway.
So, bringing ourselves back to the original topic, cash is king is only half correct and it is only true when the cash is deployed into good opportunities. In extreme cases, there may be some people who have been accumulated too much cash, but only to discover that the cash is not working hard enough for them. So they start looking around for so called ‘value investments’. Short of the necessary financial knowledge, they end up looking for the highest possible yield as that is the only evaluation criterion on their mind. Consequently, they may end up shortchanging themselves by buying into investments with mouth-watering offers that they simply could not possibly refuse. There were no short of examples. Over the last few years, people were buying into gold trading businesses, into land banking businesses, structured deposit products, mini-bonds and corporate bonds. The promise of these investments was very attractive, but the end point remains the same. The value of these investments end up shrinking to 20% to 30% of their original investment. Worse still, they are also caught in the middle of legal tussles and court cases. Even that, there is no guarantee that they can even claw back the residue value of their investments. This further undermines their trust in financial products. While ignorance is main culprit of their losses, the necessary condition that set them into such a plight is they have cash.
While mentioning all this, I am not saying that we should immediately convert our cash into investments whenever we get our hands on it. What I advocate is that we should arm ourselves with sufficient financial knowledge and appropriately allocating the cash into the investments while leaving sufficient cash holding to tap on opportunities that may present themselves from time to time.
Disclaimer – The above write-up is purely the opinion of the author, and it does not constitute an advice to buy or sell the mentioned stocks or the sector. Readers, who buy or sell stocks, if any mentioned on this article, are fully responsible for their own action.
Brennen will be conducting a one-day stock review for the past students of BPWLC on 11 March. A 2-day new course on Wealth Building in stocks investments will be conducted on 22 and 23 April 2017. Enquiries can be made via email@example.com
Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.