Cash Is A Position, Too
Warren Buffett has a peculiar problem at hand. His company, Berkshire Hathaway reportedly crossed $100 billion (Rs 6.4 lakh crore) in cash reserves early July. Most investors in Buffett’s position would be itching to deploy such a monumental war chest full of money into more lucrative opportunities than unexciting treasury bills and money market funds, but the Oracle of Omaha is in no tearing hurry. Closer home, Mukesh Ambani-led Reliance Industries (RIL) has been notorious for building huge cash stockpiles in the past. In September 2015, RIL was sitting on nearly 1.6 lakh crore of cash – Jio’s 72 million paid-user sign up earlier this year may just have justified the group’s decision to resolutely maintain such an extended investment hiatus.
Buffett has long been a vocal proponent of the “cash is a position, too” philosophy. And while he has expressed regrets at missing out on lucrative early stage opportunities such as Google and Amazon owing to this very ideology, his jaw-dropping $75.6 billion net worth shows that he has more than made up for his lost chances by using his cash positions judiciously.
The key lesson here is that retail investors need to move past the ‘fomo’ or ‘fear of missing out’ syndrome intrinsic to their investing modus operandi. Ironically, ‘fomo’ manifests itself in the worst of ways during euphoric boom phases in an asset class, when its associated risks are nearing their peak. Consider this: with the Nifty buoyantly forging ahead by nearly 15 per cent in the past 12 months, flows into equity mutual funds were a sizeable Rs 28,000 crore for the April-to-June quarter this year. When the index was 40-50 per cent lower in 2012 and 2013, and markets were rife with opportunity, equity mutual funds counter-intuitively saw outflows of Rs 15,133 crore and Rs 10,660 crore, respectively!
Similarly, the unprecedented surges in real estate prices across many areas of India in the early part of the last decade prompted many an uninformed investor to rush in and consume their cash reserves and buy homes. Prices have remained stubbornly low for the past five years now.
With returns from gold not making the headlines, yields on fixed income securities falling, and real estate activity continuing to stay muted at best, more investors seem to be jumping onto the high-risk equity bandwagon as it continues its steady ascent. But why not consider higher cash positions instead – at least temporarily?
Investors need to be more receptive to the idea of sitting on cash positions from time to time, in times when suitable investment opportunities do not present themselves. One can take a cue from dynamic asset allocation (DAA) funds, which steadily increase their cash positions as prices of securities move up, only to deploy them as prices fall. Most DAA funds now have net equity positions not exceeding 40-50 per cent. So, if you are late to the equity party and are suffering from ‘fomo’, sit back and reconsider your stance. With today’s rich valuations, earning 6.5 per cent from liquid funds on a good chunk of your portfolio may not be such a raw deal. After all, cash is a position too – and some returns are a whole lot better than negative returns!
