Words of wisdom? “Cash is king”

The following is an extract from our research report: Do famous investment savings hold water?

“Cash is king” – WISE score: 8/15

Durability: 4/5

Close to full marks. The first reference we can find is in 1890, in a self-help book for retailers. It appears as one of 12 wise business maxims alongside such other gems as ‘keep everything in its proper place’.[1]

Reliability: 1/5

Over the long run, cash returns have struggled to keep up with inflation. Ibbotson’s database[2] gives an inflation-adjusted return on T-bills of just +70 basis points (bps) per annum over the past 100 years. This is substantially lower than other investable assets (equities, bonds or real estate). There’s a reason that ‘cash is trash’ also circulates!

Insight: 3/5

Cash has an important place in most portfolios. It is useful for meeting unanticipated liquidity needs and, for tactically minded investors who cannot opportunistically leverage their portfolios, cash has an implicit option value. By holding a liquidity buffer, investors can deploy cash when market conditions are favourable.

However, like any option, cash’s value is a function of the volatility of the asset you might purchase and the cashflow it throws off relative to the interest rate.

If you believe that high prices on risk assets are indicative of low (or even negative) expected excess returns going forwards then the option value of cash is greatly enhanced, but that’s really making a statement about the usefulness of valuation indicators.

[1] Mclean (1890), “How to do Business, or the Secret of Success in Retail Merchandising” Jefferson Jackson, Chicago.
[2] First published in 1976, Ibbotson’s “Stocks, Bonds, Bills and Inflation” contains monthly returns on a range of asset classes since 1926.