A group of Maryland students sat waiting in a classroom on campus. It was 2013. And then, Warren Buffett walked through the door.
I don’t know how he came to be there or the purpose of his visit. But, the professor of that class, David Kass, took notes as his students searched for guidance and answers from the Oracle of Omaha.
It can be somewhat “cheesy” and even “too easy” to over quote Buffett. I usually question the people who do that. But in the end, his wisdom is better heeded on a mass scale than ignored for snobbery. Buried deep in that day’s class notes is a story from Buffett I have never seen.
I don’t know many investors who call cash an attractive investment. Only the most grizzled traders I know talk about it. My trading friends say cash is, indeed, a position. They talk about it like they’ve seen some serious sh*t. Like the market knocked them down, cornered them, and brought them to a final stand. It was then, at the darkest hour, a powerful weapon stored in the depths of their brokerage account emerged.
Buffett was abnormally ready for the Financial Crisis.
Almost *too* ready.
He had probably seen his share of crashes. He had probably learned something. The level of cash he, and Berkshire had on hand at the time was unlike anything else in the world including Governments, and any tech giant. Had he been an angrier or more sinister person, you have to wonder if he could have bought armies, moved into power, or let the entire thing crumble. What if he did not loan money to Goldman or Bank of America? What if he chose not to help the the US Government at the time?
I stopped reading. “That’s beautiful.” I read it again. Buried in the professor’s class notes, I found the ultimate reminder about the importance of green in its most natural form:
“In September 2008, we came right to the abyss. If Paulson and Bernanke had not intervened, in two more days it would have been all over. Berkshire Hathaway always has $20 billion or more in cash.
It sounds crazy, never need anything like it, but someday in the next 100 years when the world stops again, we will be ready. There will be some incident, it could be tomorrow. At that time, you need cash. Cash at that time is like oxygen. When you don’t need it, you don’t notice it. When you do need it, it’s the only thing you need. We operate from a level of liquidity that no one else does. We don’t want to operate on bank lines.
There is no authority for the US Treasury to guarantee money market funds. Their power comes from Congress. Paulson set up an exchange stabilization fund in September 2008 to guarantee money market funds. This stopped the run of money market funds and it was all over. Something like that will happen maybe a couple of times in your lifetime. Two things when it happens again:
1. Don’t let it ruin you!
2. If you have money and guts, you’ll have an opportunity to buy things at prices that don’t make sense!
Fear spreads fast, it is contagious. Doesn’t have anything to do with IQ. Confidence only comes back one at a time, not in mass. There are periods when fear paralyzes the investment world. You don’t want to owe money at that time, and if you have money then you want to buy at those times.”Warren Buffett at the University of Maryland, 2013
I do not believe in timing the perfect bottom. But I do believe that with the right strategy and process, you can get a chance to try. And the odds, at that time, will be in your favor. You can only have that opportunity, however, if you have cash.
Cash is optionality on opportunity.
You can’t buy dips, breakouts, or puts, and you can’t be a lender of last resort.
If you have cash, you can chose to play during times of extreme volatility. If you don’t, you will be left hoping it swings in the eventual direction you want it to. Is that a situation anyone wants to be in? Wishing? Hoping? That’s for Star Wars and Lord of The Rings. Putting yourself in favorable situations is what you do when your own money is on the line.
Cash is a position. It is an investment. It’s a reminder you have the freedom to make a choice when oppuruntity arises rather than being dependent on a wish. Or hope. Or a prayer.
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If you missed it, here’s what I learned about the stock market in 2018.
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