Let me tell you something interesting from The Great Depression of 1929. Something about a valuable lesson learned from one of the greatest financial tragedies. The term “The Great Depression” may sound familiar to your ears but certainly not Benjamin Roth.
Well, he was neither a trained economist nor a financial professional. Just an un-seasonal writer. A serial observer of the stock market. And a practicing lawyer.
Throughout the 1930s, he maintained a personal diary. When the market collapsed like a pack of cards, he noted down his observations. The way people cut back on their spending. The way companies laid off their workers. The way people struggled with their bills. The way Americans dealt with the anxiety of an uncertain future. He penned down all of it.
Without using any fancy words or metaphors, he beautifully exposed the other side of this financial tragedy. A tragedy as experienced by common and middle-class Americans.
In an era when we are glued to typing, seeing one of his hand-written notes feels enticing to eyes. Below is one such rare gem.
Image: The Actual Diary Page | Source: The Great Depression
Unfortunately, his work was nearly unknown to the outer world until his son decided to publish it in 2008. The questions that he had asked in the diary are still relevant today. How should an honest person build wealth for a lifetime? How can someone survive a catastrophe financially?
But there is one important lesson that I believe must be engrained in our brains.
Lesson Learned: Have an Adequate Cash to Deal with Tragedies
Throughout his diary, he emphasizes the fact that having a substantial amount of cash can surely help us build a fortune out of such crises. Many of his diary entries reveal this fundamental advice.
One such entry from July 30, 1931, says:
Magazines and newspapers are full of articles telling people to buy stocks, real estate etc. at present bargain prices. They say that times are sure to get better and that many big fortunes have been built this way. The trouble is that nobody has any money.
December 11, 1931:
It is generally believed that good stocks and bonds can now be bought at very attractive prices. The difficulty is that nobody has the cash to buy.
June 5, 1931:
There are times, however, in a depression when cash money is king and many good investments can be purchased at a big discount.
September 19, 1932:
Cash is king in every depression. A small investment in real estate or stocks or bonds in 1932 would be worth a fortune today. Even the good stocks, bonds and real estate were selling at giveaway prices but few men had both the cash and the courage to buy when things looked the blackest.
July 11, 1933:
Again and again during this depression it is driven home to me that opportunity is a stern goddess who passes up those who are unprepared with liquid capital.
October 12, 1933:
Here again we have proof that it is wise for the investor to have liquid assets on hand so he can take advantage of these opportunities. A small fund could be kept for this special purpose.
January 9, 1937:
Yesterday I had lunch with a lawyer of Youngstown – age 42 – never had much of a practice – always poorly dressed and few friends. Yet in 1932 he had $5000 in cash accumulated out of his small earnings. He had the courage to invest it all in common stocks at bargain prices – and he had the patience or foresight to hold these stocks until the present day – they are now worth over $100,000.
December 23, 1937:
A certain amount of cash, bonds or other liquid securities should always be set aside for protection or to seize unexpected opportunities.
This sage piece of advice is still valid today.
What worked then still works now.
Besides, during this phase, the market nosedived by 89%. People lost their savings overnight. Wages plunged by more than 40%. Unemployment rose to its record high of 25%. But post-1932, the market rose by leaps and bounds. Many stocks surged by 15-20x.
The ones who had the cash and courage to invest seized the lifetime opportunity to build their fortunes.
Image: News Clipping from 1929 | Source: Social Studies6 Times
What Do We Really Think About Cash?
Well, when the market is in the upswing, we hate sitting on cash. Knowing the fact that cash in the bank earns just a stingy return, we deploy it to earn fancy returns. No matter how expensive the stock is.
But once it crashes, we realize how valuable holding an ample amount of cash is. Consequently, we miss the train adequately loaded with cheap bargains.
In short, the lures of grabbing excellent returns make us underestimate its true worth.
This same thing has repeatedly been written before. Said before. And read before.
Its True Worth Lies in the Options It Provides
We may get disappointed by looking at a minute 0-4% return it earns today. But the options it offers to grab the discounted bargains during the future market declines are immense. Observe the keyword – “options”.
Whenever you are bombarded with opportunities, exercise your option to convert cash into buying stocks that are available cheap. And grab the opportunity to build the fortune for a lifetime.
Moreover, its capability to earn more in the future compensates for today’s depressing returns.
Let me show you something exciting.
Imagine that you are in 2006. (Disclaimer: Just for illustration purposes, I have cherry-picked 2006. The aim is to show the valuable option your cash position provides).
The cash in your bank earns nothing. Just nothing (green line). And your neighbor suggests you invest it in Stocks (blue line) to earn handsome returns.
What will be your decision? Of course, buy stocks and watch the rising sun.
Upon his recommendation, whatever surplus you are left with, you deploy all of it.
But then, 2008 arrives. The US sneezes. Every other country in the world catches a cold. The Recession looms. Markets tank by more than 50%. Your urge to buy discounted bets takes a back seat due to the absence of cash.
On the other hand, your returns would be much higher if you chose to sit on cash until 2009 (orange line). Exercised your option to buy the stocks that are available cheap. And then decided to stay the course.
But most of us don’t think that way.
All we care about is the return, not options. A similar situation happened during the COVID-19 outbreak too. Many of the business leaders plunged by more than 30-40%. The ones with surplus cash turned it into a profitable machine by leveraging golden opportunity.
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Professor Sanjay Bakshi has been extremely vocal about holding cash. He recommends allocating a sizable portion of the portfolio towards cash and cash equivalents such as liquid funds, bank FDs, etc.
It’s true that holding cash does cost money. Post taxation returns can’t even beat the inflation.
But then, it offers us an option to exploit the possibilities that arise due to volatility in the market.
My point is that even though holding cash costs money, this cost is more than offset by the extra returns earned through intelligent action taken at a time when the market is behaving stupidly.
Further, he adds:
In the recent past, there have been several occasions when the availability of cash enabled some of my clients to take advantage of irrational market behaviour.
One was on the day the government lost the vote of confidence. Stocks were dumped on that day as if there was no tomorrow.
For this particular client, I bought 30,003 shares of State Bank of India at an average cost of Rs 171. Exactly one month later, when sanity had returned on Dalal Street, these shares were converted into cash at an average price of Rs 211. (That immediately after I sold these shares, the stock went on to Rs 272 is another story.)
The total pre-tax return came to Rs 12 lakhs. A return of Rs 12 lakhs on a Rs 51.3 lakh investment translates into 23% over a holding period of one month.
But this return would not have materialised if my client was not holding cash on that fateful day when the government fell.
Opportunities like these are common in India. Sometimes, it’s due to political turmoil. The other times, economical or global factors come into play.
But it really makes sense to hold cash to grab such money-making opportunities.
And this is what makes it really a King!
Thank you for reading. Stay safe 🙂
Cover Image: Pixabay
Dhruv Girdhar | RichifyMeClub
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