If holding cash in your portfolio for little return is driving you crazy, maybe it’s time to look at it the way Warren Buffett does. Mr. Buffett, the world’s most successful (and richest) value investor, is sitting on almost $41-billion ... He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.
For Warren Buffett, cash is a non-expiring call option on every asset class
By Patrick Follow Fri, 12 Oct 2012, 3:26pm 1,396 views 14 comments
In Menlo Park CA 94025
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Cash is king during recessions and depressions.
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W.C. Varones's website
... until it's not.
With the federal government running deficits of 8% of GDP and the Dirty Fed monetizing those deficits, it would be insane to hold most of your assets in cash.
Zimbabwe Ben has promised to destroy the dollar. What will stop him?
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In a situation like this, the only reliable currencies are bullets and yams.
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W.C. Varones says
The bond market.
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He also thinks of the federal government as an insurance agency to which he owes no premium, yet their purpose is to protect and grow his wealth at every turn
what's next, the levered RE speculators are going to come pat warren on his back about what good capitalists they all are. LMFAO
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Patrick says
In other words ... inflation. The USG cannot afford the 10y treasury to go to 5%, much less 8 or 10. Servicing costs on the debt would eat up all collected taxes. Helicopter Ben is running out of fuel. Prepare for autorotation.
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What's autorotation? Helicopter slowing descent by just letting the blades spin?
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Warren Buffet also sold some assets to buy up that railroad a few years ago. He said it used up most of his cash. He also has a large number of businesses which produce gobs of cash all the time. 41B in cash probably doesn't represent that much above the norm for him.
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I moved most of my 401k into cash a few years ago and use a smaller fraction as Mad Money to go into high growth small cap funds.
People still don't understand that with these "target funds" they are completely exposed to a 100% loss or some fraction there of.
The look at possible upsides of a few percent but never the devastating potential losses. Cash insulates you from that.
Invest? Sure...but don't put your future on automatic!
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Patrick says
Yep. It's actually a gliding descent with the blades spinning. You trade altitude for accumulated energy in the rotor system in the glide then use that energy to halt your descent right before hitting the ground.
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This article is one of the biggest piece of bull****s I read on this forum. The article confuses options as a financial instrument with optionality in a conventional sense. Options. as derivative instruments, on an asset go up or down (depends if it is a call option or put option) as underlying asset goes up. How does cash value as a call option increases if stock market or real estate goes up?
Cash is an asset of u.s. dollar. You hold it if you think dollar will strengthen relative to other assets. It does give you an option in a conventional sense to rebalance into other assets if those assets drop relative to dollar.
The author is ripping off Warren Buffet's reputation.
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mye says
Indeed.
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mye says
Cash is different from other assets because all other assets are priced in terms of it.
There is a distinct and measurable value to having cash on hand to be ready for any deal that might arise.
Imagine two buyers. One has cash on hand to buy a house when he can get a good deal, and the other buyer has to sell some asset to come up with the cash to buy a house.
The one with cash on hand is likely to get a better deal because he can act instantly while the other guy has to take time and pay transaction costs to come up with cash.
The value of the cash option is the value of being first, and of not having to pay that transaction cost.
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What you described is the optionality in a conventional sense. However, if you want to categorize Cash as a real option in financial sense. It is more of a put option for all risky assets such as real estate or stock market. As you described, as one sells a house, he is long cash. When everyone is selling houses, Cash gets expensive just as the put option on real estate. Follow the rules of buy low and sell high, at that time it is nice to have cash to sell and buy houses.
But compare to safe assets, such as treasure bonds, Cash probably acts like a call option. Anyway, whichever way you look at it, the statement in the article is false and I doubt Warren Buffet said that to her. :)