Why cash is king today

One of my most popular tweets last week was my comment that “Cash is king.”

Many might have misinterpreted this to mean sell everything and just stay in cash.

Just to clarify, I said “cash is king” not because I think cash is the best asset to own from a return perspective.

Although cash, particularly the US dollar, has provided the best return so far this year compared to all other asset classes including bonds and stocks, it’s not the best asset to own in terms of creating or even preserving wealth from a longer-term perspective. This is because the same amount of cash will buy you fewer goods over time, especially if inflation remains elevated.

However, cash is king today because of its limited supply. Given the high level of risk aversion, it is very difficult and expensive to borrow money and raise capital.

Cash is also king because of the abundance of opportunities available to cash-rich investors. Right now, there are so many bonds, stocks and nonfinancial assets that can be bought at a huge discount.

For example, the Philippine Stock Exchange index is currently trading at only 12X P/E. The only other time when the Philippine market traded at this level during the past 10 years was in March to April of 2020, when the COVID-19 pandemic began. Prices only drop this low during times of crisis, which rarely happens.

Cash-rich businesses also have an advantage today because it allows them to weather the storm and gain market share from competitors who might not have the financial muscle to replenish their inventories because the dollar is too strong, or their borrowing cost is too expensive.

For example, a lot of locally listed companies are now earning more than what they did prior to the pandemic because many of their competitors who were smaller and didn’t have deep pockets were forced to close during the pandemic.

That said, there are also good reasons why it would be better for some investors to raise cash by selling their bonds or stocks instead of staying invested.

If you bought stocks, bonds or any financial assets using borrowed money (margin) or if you need the proceeds of your investment to pay for something soon like your child’s college tuition, then I strongly recommend that you sell. Financial markets are going to be difficult for a while.

Even if you are already suffering from a loss, there is a risk that your losses will become even bigger if you stay invested because you might suffer from a margin call. Moreover, nobody knows when the market will bottom and there is a possibility that the amount you need to pay for becomes due before the market recovers. This might force you to sell at a price that is even lower than what it is today.

During difficult times such as these, be honest and ask yourself if you have enough liquidity to stay invested until the market recovers. If you don’t, then be patient because you can’t afford to be greedy (when others are fearful). Slowly build your capital and wait for the next crisis to capitalize on the opportunity to buy assets at extremely cheap prices.

After all, a lot of rich investors become poor during crisis because of liquidity problems, and not because they picked the wrong stock or bond. INQ