Cash has quickly become the biggest loser in recent years as euphoria moved to panic and panic moved to euphoria. Many investors have noted this search for yield as investors are forced out of cash and into higher yielding assets. This is exactly what the Fed has been hoping for of course. It is, in my opinion, only one more contributing factor to the flawed theory that nominal wealth effects result in sustained wealth. But cash is not always trash. In his weekly letter Jeff Saut discusses the idea that cash is not trash and can actually be utilized quite strategically in a portfolio:
To be sure, unlike many investors, I consider cash to actually be an asset class. To put this loathsome asset, i.e., cash, into perspective, Seth Klarman, an outstanding value investor, dissected the faulty rationale that “cash is trash” during an interview in Grant’s Interest Rate Observer. To wit:
“They compare the current yield on cash (lousy) to the current yield on longer-term bonds or (the) dividend yield from a stock. Cash nearly always loses in this comparison, and investors feel quantitatively justified in doing what career and client pressures cause them to do anyway. It makes no difference how overvalued these alternatives may be in an absolute sense.”
Further, I would note Seth’s point that investments be made “not because cash is bad, but because the investment is good.” I think some people lose sight of this fact.
Now, coming up to Seth’s key point, which is ignored by nearly everyone:
“One of the biggest challenges in investing is that the opportunity set available today is not the complete opportunity set that should be considered. Indeed, for almost any time horizon, the opportunity set of tomorrow, which could be greater, narrower, or similar in scope but different in specifics from today’s, is a legitimate competitor for today’s investment dollars. It’s hard, perhaps almost impossible, to accurately predict the volume and attractiveness of the future opportunities; but it would be foolish to ignore them as if they will not exist.”
These are great thoughts. Yield doesn’t equal value. Reaching for yield just because cash appears to be trash is beyond foolish. Of course, this is what the Fed wants you to do. They want us to be reckless and speculative. They want us to reach out on the risk curve and bid up any assets that aren’t cash or cash equivalents. It’s difficult when one is not fully invested during a raging bull market, but this isn’t the first time the Fed has attempted to create a virtuous cycle via a wealth effect. It’s not a sustainable strategy and those who utilize cash strategically will forego a bit of upside while generating superior risk adjusted returns.
Source: Raymond James