The case for holding cash in a polycrisis

As a polycrisis tilts the balance towards risk over reward, holding cash can protect capital while investors wait for the right opportunity.

I recently gave a presentation at the Equity Mates ‘FinFest’. For those that are not familiar with this event, it is set up as a cool music festival-style event, the difference being that there are no musicians, just financial ‘experts’ giving talks on a variety of subjects. It is all very casual and aimed at the Equity Mates demographic. Some would call them ‘HENRYs’. High Earners Not Rich Yet. The idea of Equity Mates is to promote young people to invest. It does not matter if they are high earners or just trying to keep their heads above the rising tides of the rental market or mortgage rates; everybody should be planning for their future. As usual, it was a great event with some terrific speakers. There was something for everyone, and multiple stages were set up with headphones, and the presentations were transmitted to the audience. All very high-tech, but at least it ensured you could hear the words of wisdom.

I was lucky enough to be invited to present. The subject I had been given was my best idea. My best idea? One of my favourite ideas, especially with a younger audience just starting out, is just to ‘start’. You will make mistakes. You will invest in the wrong thing. You will buy some sure-fire winner that your mate gave you at a BBQ, or worse, from an Uber driver. Of course you will. I have been doing this a long time and make mistakes almost daily. You think that I would be an ‘expert’ by now and have all the answers. I wish. Markets are like smoke. As soon as you think you have them all figured out, the smoke drifts off elsewhere. Given that I was preaching to the choir on starting out, the reason they were all there was precisely that they were or had been starting. So, my best idea? I racked my brains, I ran my scans, canvassed some ‘experts’, and still I was struggling. The reason was an ‘abundance of caution’ in the market currently, and the risk-reward seems to be tilted towards risk.

Investing through a polycrisis

We appear to be in a polycrisis mode. This is not when your parrot is feeling a little off colour and is off its seed; this is a confluence of risks that seem to have built up. There is an old story about how to boil a frog. Just dropping the frog in boiling water does not work, as it jumps straight out. The answer is to put the frog in cold water and then boil it gently. Before the frog realises what is happening, it is all over ‘green toader’! It feels similar at the moment. The risks and the issues are piling up, but they seem to have been around forever, and we have got used to the ‘she’ll be right’ mentality. I could draw up a long list of current risks. We are all aware of them. The AI bubble being the most obvious. But government spending, debt, inflation, interest rates, civil unrest, China, oil, central banks offering no real leadership. Political unrest, Ukraine, valuations, the looming AI technology that will destroy the world and take our jobs. Probably the other way round.

We know the risks. We see a slowing economy locally. People are struggling with the cost-of-living pressures. Things are just getting more and more expensive. I saw a chocolate croissant for sale in an inner-city trendy bakery for $11. No wonder young people cannot afford a home deposit. It is not even the avocado toast any more.

Why holding cash is my best idea

Given that FinFest is about getting younger people interested in investing, my own presentation seemed completely at odds with this. My best idea was ‘cash’. Now I know that seems like a cop-out, but it isn’t. It is hard to hold just cash and wait for an opportunity to knock. Very hard. FOMO plays a big part, but what about FILM? Fear I Lose Money. The first rule of investing is do not lose money. Do not lose capital. Harder to do than write, but losing capital makes everything so much harder. That is where cash collides with polycrisis. With all the incumbent and evident risks currently, it seems prudent to have higher cash levels than normal. Why take all that risk when a bank account is yielding over 5% in some places? You are being paid relatively handsomely to sit it out and wait for an opportunity to strike.

Gordon Gekko’s speech, rewritten for cash

I was reminded of Gordon Gekko in Wall Street. His famous speech at the AGM.

“Well, ladies and gentlemen, we’re not here to indulge in fantasy, but in political and economic reality… I am not a destroyer of companies. I am a liberator of them. The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit. Greed, in all of its forms – greed for life, for money, for love, knowledge – has marked the upward surge of mankind and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.”

Now I have amended it with a more ‘cautionary’ tone and a focus on cash instead.

Ladies and gentlemen, let me tell you something about cash. Cash is the ultimate weapon. It buys opportunity, it buys time, and when everyone else is running for the exits, cash buys you the chance to pick up the bargains. You see, some people think cash is boring. They call it lazy capital. They say it should always be working, always be invested, always be chasing the next big thing.

Rubbish.

Cash doesn’t panic. Cash doesn’t get margin calls. Cash doesn’t need a rescue package when the market decides that yesterday’s genius is today’s idiot. And when the music stops, the one sitting on a pile of cash isn’t the one looking for a chair. He’s the one deciding who gets to stay in the room. The market is full of people who confuse activity with intelligence. They’re buying the latest hot stock, chasing the latest narrative, falling in love with a CEO who promises to change the world. They’re so busy trying to make money that they forget the first rule of investing: don’t lose the money you’ve already got.

Cash gives you choices. It gives you patience. It gives you the ability to say no when everyone else is saying yes, and to buy when fear has turned the whole market into a fire sale. So don’t tell me cash is dead money. Dead money is the stock you bought at $10 because everyone said it was going to $20, and now you’re praying it gets back to $5 so you can sell.

Cash is freedom. Cash is optionality. Cash is the ability to wait for the ‘fat pitch’ instead of swinging at every ball that comes your way.

And when the next panic arrives, as it always does, remember this: the person with the most cash doesn’t have to predict the future.

You just have to be ready when everyone else gets it wrong.

Waiting for the fat pitch

Now I am not suggesting that cash is always king. It isn’t. But there are times when it pays well to sit on the fence and wait for a ‘polycrisis’ to pass. Here at Marcus Today we sometimes call it the ‘fat pitch‘. The one that demands to be hit. Letting through the riskier balls to the keeper. I like to think of it as going fast in the straights and slower into the bends. You can always come out fast, but going in hard can lead to a serious misstep. Chicanes and corners are coming up. Foot hard down on the straight, but brake into the corner.

Remember Rule #1, and you won’t go far wrong. It is all about risk vs reward, and right now, that is harder to work out.