On... Cash is King

I had wrote that Cash is Trash. But now, I also say that Cash is King.

What's going on here? With all things financial, there is always a paradox. And the role of cash is one of them. Forget about what I said about cash being trash and see why I say it is king and you judge for yourself on the Role of Cash.

Cash is actually a Call Option without an Expiry. How powerful is that? For those uninitiated, a Call Option is basically a Contract which gives the buyer the rights to buy a Financial Asset at a certain strike price within the contract expiry date. Now, a Call Option without an expiry date - that's Powerful!

Let us take an example that I often come across. During the 2008 Financial Crisis, one of the biggest laments of investors was not that their investment had plummeted and crashed. Of course, that hurt a lot. But a savvy investor know that the crash is temporary and when things eventually clear, the price will rebound. However, without enough Liquid Cash on hand, you will not be able to pick up these assets selling at a discounted price.

That is the investment perspective. It goes without saying that you need cash to run your daily lives. What are you going to do at the shops when you want to buy groceries? Barter trade? You obviously need cash. Also when you encounter an emergency and require money, you do not want to be a forced seller of your Financial Assets. Being a Forced Seller means you cannot get a good price for your Assets.

Does this mean you want to keep a lot of Cash since Cash is King? Well, not really. We need cash but we also know that Cash is a melting ice cube (with its value being eroded due to inflation with the passage of time). It is really a balancing Act. You want to keep enough but not too much. I personally think that keeping one or two years of Annual Expenditure is a good range.

Is Cash actually Trash or King? It is both!