Cash Is Also A Position

JC Parets
December 4, 2018

You hear it all the time, "Cash is King". But we forget that it really can be. Not all the time, very few times in fact, but cash does serve a great purpose.

There are a lot of institutions that are not allowed to go to cash, as part of their mandate. The majority of investors, however, do have that option. Why not use it?

You're going to see a lot of the passive investing community advise against cash. "Market sell-offs are an opportunity to buy more at lower levels", they say. "You're not disciplined or smart enough to get back in", they preach. "Just buy and hold and everything will be ok". It's all based off this theory that the market always goes up. I guess if you trust data based off the tiny sample sizes that we have, you'll believe anything.

For those of us forced to live in reality, a 'close you're eyes and hope it goes away' approach is not an option. We're proactive and we're here to make money in the market. More importantly, we're here to protect the money we already have.

I understand the case that getting whipsawed around creates opportunity costs, transaction costs, tax implications and all sorts of headaches. It's part of the deal we make with the investing gods. But if you want to avoid having to think like a big boy, go pay someone a fraction of a percent to manage your assets. You'll most likely get what you pay for.

If you're like the rest of us and are here actively trying to make (and protect) capital, whenever in doubt, stay out!

David Keller, former President of the CMT Association likes to fly planes when he's not looking at charts. He says, "that it's better to be on the ground wishing you were in the air, than in the air wishing you were on the ground". We can say the same about markets.

If you don't think you have an edge, then get smaller. There's nothing wrong with that. The one thing we're guaranteed in the market is that there will be more opportunities in the future. This isn't like venture capital, where if a Facebook comes across your desk and you skip it, it's a big miss. That's unacceptable in VC land. In public markets, however, there will always be another one. That is the only thing Mr. Market promises us.

I know some day traders that are making their year with this sort of intraday volatility. They haven't seen it in years. Some new ones have never seen it. That might be great for a smaller time horizon. But for a more intermediate-term investor, it can be easy to get chopped up in this mess. We've been huge advocates of heavy cash positions over the past 2 months. I see no reason to abandon that approach now.

We have specific things we like long, we have some we like short, but cash has been a consistent winner since early October. Long bonds have started to work since November, but cash is a real winner as well.

Don't let anyone tell you that heavy cash positions are a bad idea. It's your cash. You earned it. If you want to raise cash during more volatile environments, I think it's way better than getting chopped up, or worse, closing your eyes and hoping the big bad market goes away. Those stupid stats since 1920 mean nothing. The margin clerks don't care about what happened in the 1940s or the 1980s. They're going to force liquidate positions when they feel like it. And I don't mean just yours, I'm talking huge institutions being forced to sell. Your fundamentals mean little in the face of forced selling.

Nothing in this market surprises me. I’ve been pounding the table that there is a ton of risk out there. I have not seen any evidence that this has changed. Quite the opposite actually, the data that has come in is characteristic of down or sideways trends at best, not uptrends.

I still like the cash trade from any sort of intermediate-term perspective.

JC

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