Cash Is Trash | Stock Talk Podcast
“Cash is Trash”, Is it for the average investor?
“Cash is Trash”, well it is if you listen to billionaire hedge fund manager Ray Dalio of Bridgewater Associates. Mr. Dalio started using this catchy phrase quite a few years ago but became notorious for it when he pronounced it from on high, both literally and figuratively on January 21st, 2020 amongst the business and political elites in the mountains in Davos, Switzerland at the World Economic Forum. And then Covid hit and the S&P500 dropped over -30% in just four weeks. Is cash trash for the average investor?
I am Chris Perras, Chief Investment Officer at Oak Harvest Financial Group, and I wanted address the notion that “cash is trash” for investors other than billionaires or 100 year time horizon endowments and pension funds that Mr. Dalio markets his funds to.
I cannot argue with the basic premises behind Mr. Dalios proclamation. He’s makes good arguments for calling cash trash. His basic rational has been that a mushrooming money supply and government money printing caused by our deficits would eventually bring on inflationary pressures and a weakening of the dollar. After nearly 30 years of deflationary pressures caused by 1) rapid technology adoption,2) outsourcing of our production and labor to cheaper continents, and 3) morphing and aging demographics here in the USA, a combination of Federal Reserve based stimulus and money printing, coupled with supply chain disruptions and an acceleration in baby boomer retirements look to have finally inflected long term inflation rates upward above 2%.
Does the investment team at Oak Harvest subscribe to Mr. Dalio’s “cash is Trash” declaration? I’ll let you know shortly, but Give us a call at (877) 896-0040 and give our investment team a chance to help you with your investment allocation, and have our financial planning team model your cash needs and greed’s into and through your retirement years. Weather your cash account is yielding a few basis points or a few percentage points, The entire Oak Harvest team is here to help you navigate into and through your retirement years.
So the question is cash trash?
If you have taken ever an economics class, you know that “inflation” is a tax. It’s a tax on savers. It’s a tax on those holding cash, other fixed income investments. It’s a tax on any asset that does not either have pricing power to raise prices and offset inflation or 2 maintain their own utility of use, like a basic industrial commodity maybe,
Inflation is a consumption tax in reverse. How is that? It’s a tax on deferring consumption. If you don’t buy that good or service today, it might cost you 5-10% or more next year. In a hyperinflation world, people see 100-500% inflation moves and crashing currency values. Venezuela and Turkey are the most recent examples. We aren’t talking about that kind of inflation here in the US, and our team does subscribe to the 1970’s type of inflation either, but we are now running much higher than the Fed’s 2% inflation goal.
In Mr. Dalio’s world, both TINA, which recall stands for “there is no alternative” to equities and FOMO, that’s “fear of missing out”, rule the day in unison and no rational investor would 1-carry an investment “cash” allocation in their portfolio as you would be guaranteeing you lose money versus inflation. In the finance world, you would be surrendering to a “negative real return”. So, in Mr. Dalio’s asset allocation scheme, you would be 100% invested in something other than cash all the time. Every day, every week, every month. You would be “all-in”, chips in the middle of the table, let the good times roll, volatility be damned, opportunity to buy in a down market not possible because you have no cash. In Mr. Dalio’s world, the “greed factor” seems to far outweighs one’s “needs” level in the investment and allocation equation.
Viewers, this might make some rational sense to Mr. Dalio personally. He is a billionaire and doesn’t need cash to pay bills. What bank in the world wouldn’t lend him a little money to meet he’s monthly needs? What firm wouldn’t advance him cash to buy an asset if he came to them and said he saw a great deal on a mispriced security?
And viewers, this cash is trash strategy may make sense to Bridgewater’s investor base, who are largely endowments with 100 year and longer time horizons, or pension plans whose liabilities run decades. I remind viewers, clients who are intuitional in nature, not retail like you and me. And to whom, Mr.Dalio is charging a hedge fund fee structure for a “risk parity” strategy. In other words, it would be really tough for him to charge clients 2% and 20% of the profits if he was sitting around with a lot of cash.
However, in very few worlds, in my opinion, is “cash trash”. In very few worlds, do older investors not need bonds or bond alternatives. In very few circumstances is it smart to be a, I’m 100% long equity assets or other assets as a retiree or near retiree. And I would argue, this “cash is trash” theory makes little sense to the rest of us, the other 99.99% of investors who are NOT billionaires.
Mr. Dalio’s, Davos “cash is trash” call on Jan 21, 2020 could not have come at a worse time. It could go down as one of the worst market timing calls the last 30 years. His hedge fund then suffered a -20% loss in the 1st quarter 2020. He’s made follow on calls like this each of the last 2 years and amazingly, each time he has, within a period of 1 to 7 days the market has declined 5-12.5%. Cash is Trash? And poof, here comes a pullback, correction or bear market in stocks each time he has been center stage saying this.
Equally, interesting to me is that despite, Mr. Dalio’s ongoing calls of cash is trash for years, Bridgewaters, Pure Alpha 2 hedge fund, according to Bloomberg, has returned a paltry 1.6% per year net of fees for the last 10 years in one the biggest bull markets in 100 years. The Orange County retirement fund puts the Bridgewater return at +4.5% per year since 2005, but that lagged its benchmark by 2.5% points.
When it comes to thinking about, discussing, and using cash or even bonds as an investment category, the team at Oak Harvest would much rather look toward another billionaire investor for an appropriate model. Who is that? That would be Warren Buffet.
As of last count, Mr. Buffets company Berkshire Hathaway had over $135 bill in cash and short-term investments that includes short term bonds which with interest rates rising some over the last 9 months, Mr Buffett probably is showing small capital losses on like all retail investors are. Recall that Berkshire Hathaway is in the business of buying other companies; Mr. Buffett is Berkshires largest shareholder, and Berkshire does not charge its shareholders performance fees like a hedge fund.
Mr. Buffet has been quoted in his shareholder letters as saying this..
“I will never risk getting caught short of cash,”
Why does he say this? I believe its two reasons. First, it’s probably because Mr. Buffet, while he does not need a dime of cash, given his net worth, knows that having some cash lying around in the form of short term liquid instruments or short term bonds, as an investor is a call option on things going bad for other people. It allows one flexibility to jump on opportunities and others mistakes when misfortune comes to town, or the overall economy hits a recession.
And secondly, and probably more importantly and less talked about, for pre-retiree’s and retirees, is that Mr. Buffet knows that the sequence of an investors returns is almost as important to an investor as one’s total compounded return, especially for those nearing or in retirement.
Is cash trash? Not in my book.
With the continued volatility that we expect, our investment team recommends that you get on the phone and give our Oak Harvest team a call at (877) 896-0040 and ask to speak to one of our financial advisors and planners. Set up a meeting and sit down with one of our team and let us walk you through how sequence of returns can affect your retirement plan every bit or more than the average investment return your current advisor is generating you.
Thank you and have a great day.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.