The Case for Cash as an Asset Class
By Pat Hogan, Vice President & Portfolio Manager with The GB Group at Baird
In today’s very low interest rate environment, cash and cash like instruments such as money market funds
are providing miniscule yields at best. For some investors, holding any type of allocation to cash can be
uncomfortable as it essentially ensures a meager return. These investors may feel compelled to allocate that
cash to other investments in an effort to generate a potentially higher return regardless of how it fits with
their recommended asset allocation. In contrast, we see a lot of value in allocating a portion of one’s
portfolio to cash regardless of what it might be yielding.
“Holding Cash is uncomfortable, but not as uncomfortable as doing something stupid”—Warren Buffett
You may have seen us use this phrase from Warren Buffett before because it is one of our favorites. In its
simplest terms, the fact that cash may not be earning any interest is not a compelling reason to go out and
do something with it that is not appropriate for your situation.
Current Thoughts on the Value of Cash
With a stock market that has recovered all of its losses and then some from its 2008-2009 steep decline and a
very low interest rate environment making it difficult to find attractively priced fixed income securities, we
don’t see this as an time to aggressively deploy any cash surpluses into stocks and bonds. To be clear, this is
not a bearish call at all. Indeed, we continue to find various opportunities in both stocks and bonds from time
to time that we find attractive. However, that is a far cry from saying we think markets on average are dirt
cheap or that the average bond is offering great value. Rather, we believe this is an environment where we
need to have the patience to await the so called “fat pitches” to opportunistically put capital to work.
“In investments, there’s no such thing as a called strike”—Warren Buffett
Buffett admired the discipline that baseball all-time great Ted Williams brought to the plate by being very
selective in choosing which pitches to swing at. Williams broke down the strike zone into smaller zones and
he knew which ones he was good at hitting and which ones he was not. Buffett said investors have the
additional advantage of never having to swing at an investment offering as there are no called strikes in
investing. Rather, the patient investor should wait until the “pitches” are in the sweet spot of their hitting
zone before swinging. In our current environment, we feel it makes a lot of sense to wait for the fat pitches..
We work with several investment managers, that we deeply respect, that are holding well above average
amounts of cash in their portfolios. It is important to note that not one of these managers is predicting a
significant market correction or crash or trying to “time the market”. Rather, they are just not finding enough
attractively priced securities that fit their purchasing discipline and thus they choose to hold cash until the fat
pitches arrive. Some would argue that they are not paying these managers to hold cash. We, on the contrary,
believe we are paying them to be disciplined in what they do purchase and are comfortable with them
holding cash until the appropriate opportunities arise.
A phrase we’ve heard before, “Cash is Trash”, is generally one we hear when markets are roaring ahead and
investor optimism is running high and the idea of holding spare cash is ridiculed. Conversely, when we hear
the phrase “Cash is King”, it’s usually when investor pessimism is running high and the idea of putting cash to
work is frightening. So, if the cash you have on the sidelines today feels like it is burning a hole in your
pocket, it’s probably not a bad time to keep some cash handy. When it feels like cash is the only thing you
want to own, it’s probably a good time to start thinking about putting it to work. While this sounds simple in
theory, it’s never so simple in practice. As boxer Mike Tyson famously said
“Everybody has a plan until they get punched in the face”—Mike Tyson
So, as we write this piece on October 22, 2014, we recently experienced a small correction where the broad
equity market declined just shy of 10% from mid-September to mid-October as measured by the S&P 500
Index. That was the largest peak-trough decline we’ve experienced since 2011. While it may have seemed a
little unnerving while it unfolded, it’s important to keep it in the proper context that it was hardly unusual.
According to The American Funds, when measuring a history of market declines from 1900-2013 the stock
market has experienced a -10% or larger correction about once every year and a -20% or more correction
about once every 3 ½ years*. While market corrections are never fun to experience, they have historically
happened on a fairly regular basis and we fully expect them to happen on a regular basis going forward.
When these will happen, we do not know—we just know that they will. As the old saying goes—If you are
going to predict that something will happen, don’t be so foolish as to say when it will happen. Thus, whether
it’s a significant stock market correction, a sudden jump in interest rates or some other event that awaits us,
having a little cash on hand will be a good thing.
“Cash is like oxygen, you don’t notice it 99.9% of the time,
but when absent it is the only thing you notice”—Warren Buffet
Pat Hogan
Vice President
Financial Advisor
The GB Group
Private Wealth Management
Robert W. Baird & Co.
440 South Washington Street
Green Bay, WI 54301
920-433-7300 . 800-711-6134