Cash Is King? Think Again!

Imagine you take US$1mm cash and stash it away. Thirty years later, you still have the same amount, but the purchasing power of that $1mm probably got reduced by a scary multiple due to inflation.

Nothing new right?

Then why the conventional wisdom keeps saying cash is king?

The reason is, during bad time, people who are over leveraged or heavily impacted by the downturn due to the nature of their business will dump whatever assets they have in exchange for liquidity in order to prevent themselves from being liquidated.

If we have cash, we can cherry pick their valuable assets at pennies on the dollar. Sounds amazing, isn’t it?

So, does it mean we should hold cash all the time, wait for the downturn and make a killing?

That depends.

The next downturn may take a full economic cycle, which can go anywhere from 5 to 20 years. If we have a lot of cash and don’t mind the opportunity cost incurred within that timeframe, we probably should allot a sizable percentage of cash for that very purpose, more of an insurance policy.

But if we are just starting out with very limited capital, holding cash can be very costly. We should aggressively build up our nest egg by investing majority of our cash into other asset forms.

So what assets are better than cash?

Basically, anything that can generate a better return than inflation rate of the economy we live in. However, in order to build substantial wealth, we need to do way better than simply beating inflation. That’s why we see some people invest in franchise businesses, stock market, real estate, venture capital, or whatever industry they are the most familiar with.

The idea is, to grow and preserve our wealth, our cash position should be like the electric current, constantly flowing to power multiple appliances to create value, which in turn generates more cash.

Our sole focus should be coming up with better place to invest our money (both our own money as well as borrowed money) and make sure no cash gets stale.

Remember though, we don’t want to put our hard earned cash or borrowed money into any kind of speculation (unless the bet ratio is very high, that is, the amount involved is relatively small that even if we lose it all, it shouldn’t affect the overall performance of our portfolio, but if our hunch is right, it can bring a respectable return to the table).

Instead, we should focus on value-based investing, such as launching a profitable business we have deep passion about, buying the stock of the companies where we know their management and product/service ins and outs, investing in the real estate market we know really well, etc.

For those who have no extra cash for investing and need a full time job to pay the bills, we can invest into ourselves through education so that we can get a high paying job in a promising company of our dream.

As soon as we save up enough cash, we can start our investment journey.

All in all, to be wealthy and to stay wealth, we need to focus on investing in assets that can generate above-average return. The sooner we acquire those assets, the more resilient we are to the inflation that is deteriorating the value of our cash every single day.

   

You may also be interested in the following:

  1. Borrow Your Way To Richness
  2. 3 Simple Rules Behind Explosive Wealth Creation