Question: People say that cash is king. Please explain what the phrase means. —asked at “Ask a friend, ask
Efren” free service available at www.personalfinance.ph, Facebook and SMS.
Answer: It was a day before a holiday. My friend was asking me if the type of car that I owned could comfortably sit seven people. I said my car could only sit five comfortably especially for long trips. Apparently, my friend was planning a trip to Tagaytay.
Then I asked him if he was thinking of buying a new car like mine. He said no and was thinking of either bringing his own or riding with another person who owned a car just like mine. He jokingly added that there was not enough time to buy a car in one day.
So, I replied that I could go with him to buy a car the next day. He said that the next day was a holiday and that the banks were closed. I then replied that I knew him as the type of person who would store hoards of cash at home.
Being the ever-witty person that he is, my friend replied that his cash was in the refrigerator, as in cold cash. To that I replied that I too have money at home but in appliance, gadgets and furniture because they were once “called cash.”
As defined in Wikipedia, the phrase “cash is king” is used by investors to “describe times when it is advantageous to have a large percentage of cash or short-term debt instruments available either due to falling financial markets or due to the availability of investment opportunities.” In other words, the cash could be used for taking advantage of bargains.
Cash is king presupposes that the cash being held is either new or was raised by selling investments prior to any market decline. Traders or people who get in and out of investments, (i.e. buying and selling stocks over short periods of time) like to take advantage of such buying opportunities.
In fact, as of this writing, the Philippine Stock Exchange Composite index or PSEi had fallen from a recent high of 9,058.62 to the recent low of 7,557.91. That movement represents a 16.6-percent drop that could translate to a 19.9-percent gain if the trader had sold at the peak of the market and bought back at the trough or bottom.
Of course, this is easier said than done because peaks and troughs are relative figures; you will need the next few days of data to see if indeed the price levels were at the peak or the trough.
Suffice it is to say that excess cash is important if the goal is to take advantage of looming bargains. You will not be able to take advantage of such bargains if what you have are things that were once “called cash.”