Twenty-five Rules of Investing:  1  |  2  |  3  |  4  |  5  |  6  |  7  |  8  |  9  |  10  |  11  |  12  |  13  |  14  |  15  |  16  |  17  |  18  |  19  |  20  |  21  |  22  |  23  |  24  |  25 

 

 

Cash Is for Winners

 

 

Rule 12

The aversion to cash in this business breaks my heart. Sometimes cash is such a perfect investment that it drives me crazy how few people ever recommend it. Nah, they hate the market so they are only 95% long instead of 100%. Or, they think the market stinks, so they decide to short a few highfliers against their longs.

No, No, No!

You don't like any sectors? Sell everything and go into cash, don't short Advanced Micro Devices (AMD - news) vs. Intel (INTC - news) or Nortel (NT - news) vs. Lucent (LU - news).

You don't think the market's going to do anything? Don't try paired trades, like General Motors (GM - news) vs. Ford (F - news), and don't buy defensive stocks like Anheuser-Busch (BUD - news) or General Mills (GIS - news). Just get out.

So many people never want to get out and go to cash, which is literally short-term Treasuries of the less-than-a-year variety. People start talking about how little cash earns — although it sure earned more than a year ago. Or they say, "Can't be in cash, that's for losers." But I say:

 

Cash is for winners.

 

A lot of this cash aversion stems from something that occurred a decade ago, when Fidelity Magellan underperformed because it had too much cash. As a result of the weak performance, the manager was fired! But no one ever seems to get fired for bad stock-picking. The takeaway in this game ever since that high-profile firing was: Don't dare get caught with too much cash. That's why you see and hear all of these fund managers who have lukewarm views walking around with massively long-biased portfolios.

I grew up in a different time. I only shorted when I had an edge — I can't short at all right now by contract, but back when I could, I didn't short just for the sake of having some shorts on against longs. I don't care about not having enough exposure; I care about losing money!

If I were you and I didn't like the market or didn't have anything that compelling to buy — as defined by a willingness to buy it down if the stock keeps going lower — I would go with cash. It's never wrong when you don't like the tape or when you can't find anything that truly makes sense for you.