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Stepan Lavrouk
Stepan Lavrouk
Articles (634) 

Seth Klarman Explains Why Holding Cash Is Good

It gives you the ability to buy cheap assets quickly

November 12, 2020 | About:

A distinguishing feature of value investors in the Warren Buffett (Trades, Portfolio) mould is that they tend to hoard large amounts of cash as markets go higher. At Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), Buffett and Charlie Munger (Trades, Portfolio) have accumulated an enormous $145 billion in cash and cash equivalents. The Baupost Group's Seth Klarman (Trades, Portfolio) feels the same way. In a 2008 interview with the TIFF Education Foundation, Klarman talked at length about the reasons why he likes to hold large amounts of cash.

Why would one want to hold cash?

There are essentially two broad reasons why an investor might want to hold large amounts of cash. One is to offset losses during market downturns. Another is so that they can take advantage of cheap prices when markets are down. There is, however, another school of thought that states investors should have their cash mostly deployed at all times. This ideology is summed up by the phrase: "it's time in the market that counts, not timing the market."

Now, while it is true that it is not possible to predict when a market might turn against you, it is possible to identify when valuations are becoming high relative to historical averages. It is during times like this that you want to start holding more cash, as Klarman noted:

"I think there's a tendency in the modern world of people wanting their money to be working hard, and I joke that our money is like a couch potato by comparison. In my opinion, the market tells you when to buy things. And when things are really cheap, on a Graham and Dodd valuation basis, you should like them more. And when they're expensive, you should like them less. One of the hard things about institutional asset allocation models is that they don't necessarily vary all that much based on price...Clearly, when people are paying higher and higher prices, and there's more and more competition, that's probably a less-good time to be doing something."

If there's one word that sums up the value of cash, it's this: liquidity. Making the decision to hold back and not putting all your money to work in the middle of a bull market may be difficult, but you have to remember that sooner or later, there will come a time when valuations drop and you will be thankful that you gave yourself the extra dry powder.

Disclosure: The author owns no stocks mentioned.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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