Cold, Hard, Free Cash Is Your Most Potent Weapon

to have fortress-like balance sheets trading at insane discounts from their asset value? Spend the cash.

Can you see any office buildings, apartments, high-end malls, or other properties going for 40% off their resale value? Spent the cash – on REITs.

Liquidity moves markets!

Follow the money. Find the profits! 

It’s not always easy to sit tight while other investors are spending like sailors on shore leave, buying up exciting-but-too-expensive stocks left and right, but in the end, you will enjoy the bigger, fatter returns while everyone else nurses their hangovers.

Not only will you be rich, but you’ll be in great company…

These People Used a Simple Cash Strategy

As Charlie Munger once pointed out, “It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.”

And as Munger’s better-known partner Warren Buffett once put it, “Cash combined with courage in a time of crisis is priceless.”

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Some of the most outrageously successful investors you’ve never heard of have used elegant, deadly effective cash strategies to achieve that success.

Like Hetty Green…

Right around the turn of the 20th century, Green was almost certainly the richest woman in the United States – probably even the world’s richest woman not named “Queen Victoria.”

Green’s formula was simple. When times were good, she kept her money in the bank, made first mortgage loans on high-quality properties, and was generally very conservative.

But when things were bad and stocks and real estate prices were collapsing, she would be the only one around with the cash reserves to snap up property and companies on the cheap.

A few years later, when the world had recovered as it always does, she would just sell them at several multiples of her purchase price and adopt a cash-heavy, conservative posture again.

There’s Seth Klarman, too.

Klarman runs the Baupost Fund; he’s been one of the top-performing hedge fund managers in the world, returning around 20% a year for more than 35 years now.

He accomplished this by always having lots of cash on hand, to act like Hetty Green when prices were falling.

Klarman wrote in a shareholder letter: “Our willingness to hold cash at times when great opportunities are scarce allows us to take advantage of opportunity amidst turmoil that could handcuff a competitor who is always fully invested.”

An investor without cash is like a carpenter without a hammer or a surgeon without a scalpel.

So, yes, you should have cash. If bargains are hard to find and prices have been moving up for an extended period of time, you should have lots of cash. If bargains are thick on the ground, like the diamond truck tipped over and spilled all over the interstate, that’s when you spend the cash.

I know that would seem to fly in the face of all the investment advice we have received over the years, but keep something in mind: Most of that “advice” emanated from Wall Street, and Wall Street hates cash, mostly because they haven’t figured out how to charge fees on it.

“Damn the torpedoes, full speed (and full investment) ahead” has long been Wall Street’s approach to getting your money into their pockets.

If you want average returns (or maybe even average losses), then by all means, take all of your money and buy stock indexes.

But to get rich – “Heatseeker rich” – use a cash strategy like the one I just showed you. Cash is a tool, and it is the most important one in the box.

 

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