Cash💸: is it King 👑or is it Trash 🗑❓

1. "Cash is king" is a slang term reflecting the belief that money (cash) is more valuable than any other form of investment tools, such as stocks or bonds. This phrase is often used when prices in the securities market are high, and investors decide to save their cash for when prices are cheaper.
2. It can also refer to the balance sheet or cash flow of a business; a lot of cash on hand is normally a positive sign, while strong cash flows allow a company more flexibility in regards to business decisions and potential investments.
3. A third use of the phrase can refer simply to a form of payment. Many businesses only accept cash as a form of payment, as opposed to credit cards or checks, hence the phrase "cash is king."

• There is a saying in the investment world: Cash is king! Without cash, purchases can’t be made, debts cannot be settled, and dividends cannot be paid to shareholders. In this respect, cash is indeed king, and it always will be. Yet in other respects, cash’s crown has slipped. With interest rates collapsing in the aftermath of the financial crisis in 2007 and subsequently remaining at low levels, returns on cash investments like bank and building society accounts have been poor.
• It continues a trend of the gradual erosion of the spending power of cash. Cash has produced a very modest positive return over the last 10 years but, against inflation – rises in the cost of living – it has failed to keep up. People’s spending power has gone backward, something that has really accelerated over the past couple of years. Many are realising that to make money against the currently-sliding rate of inflation, they may need to invest it.

Bridgewater founder Ray Dalio and Berkshire Hathaway founder Warren Buffett are two of the brightest, most well-respected minds in the business. But they have starkly opposing views when it comes to holding cash vs. investing it. “Cash is trash. Get out of cash. There’s still a lot of money in cash,” Dalio said at the World Economic Forum in Davos (2020), Switzerland. “The depreciation of the exchange rate and the printing of money over the next few years is going to be the biggest thing.”

Meanwhile, Buffett is sitting on a massive stockpile of cash, about $124 billion to be exact, according to Berkshire’s third-quarter 2019 filing.

So which Wall Street sage is correct and which is wrong?

Well, the answer, of course, is complicated and it depends almost entirely on what your goals and means are as an investor. If you hold onto cash for too long, it will ultimately lose its value because of inflation. Inflation all around the world will continue to erode your buying power so the notion that holding on to it is free of risk is incorrect — particularly if inflation continues to rise even more, as it has in the past.

The COVID-19 pandemic has reinforced the importance of cash management, which is always paramount in business and in our personal lives. However, it may appear that there are two divergent views on cash from two different perspectives.

Cash is king until it becomes trash

Cash is king in the business world. In the investment world, Cash is rubbish.

In the investment world, cash is rubbish. This has always been the case for almost a century since the Wall Street Crash, also known as the Great Crash of 1929, escalated by the Great Depression. The Great Depression began in the United States in the summer of 1929 and lasted until early 1933. Real production and prices have plummeted. Between the peak and low of the downturn, industrial production fell by 47 percent and real GDP fell by 30 percent. Despite the severity of the economic impact during the Great Depression, if you held cash and waited on the sidelines, you were holding "garbage." If you had remained invested in the stock exchanges, you would have benefited in the medium term and certainly in the long term.

Cash flow, revenue, and profit are important metrics to determine the success of your business, but they are very different concepts. Your business may have great margins, healthy order books, and a large receivable balance but access to cash is still a struggle. Exactly the same principle applies to investing, no matter what assets you invest in. Here we’ve discussed why cash is so important and the differences between revenue, profit, and cash.

Revenue

Revenue is the total sales your business makes before any expenses are deducted. It is important to grow revenue to grow your business, however, this is not the most reliable measure of success. You could be making substantial revenues and be chasing big orders but still, be loss-making if your expenses are too high.

Profit

Profit is the financial gain your business is making on its products or services. It is the amount that remains in your business when costs are deducted from revenue earned. To make a profit, your revenue must be higher than your expenses. Revenue is calculated at the time it is earned, rather than when cash is received. Similarly, expenses are calculated at the time the purchase is made, rather than when cash is paid.

While profit is a great measure of success, being profitable does not mean your business is thriving. For example, you may sell your products with good margins but must wait 30+ days to get paid, in the meantime you are required to pay your suppliers, employees, and other operational expenses. If you are unable to meet your financial obligations in a timely manner, this will significantly impact the success of your business.

Cash

Cash flow is the total amount of cash transferred in and out of your business at any given time. It is the difference between inflows (money received) and outflows (cash paid).

For any company to survive, cash flow is the most important financial factor. Your business could have high revenue and good margins, but if there’s a mismatch between cash in and cash out, you could have negative cash flow. While a business can manage negative cash flow in the short-term if you have cash reserves, eventually a business must focus on creating positive cash flow to pay operating expenses and support growth.

So, if you have a business, it would be beneficial for you to save cash for 6 months to cover expenses such as rent, salaries, etc. In the event of a dire situation, your business goes through, you will have your Business run for 6 months without generating revenues. A good example I can imagine is Bill Gates who recommended that Microsoft save 1 year of business expenses in cash in their bank account so that it is prepared for any scenario that could impact business. His idea is for his business to run 100% and not to be downsized, which means he doesn't need to emphasize the thought of reducing staff and expenses etc. But if you save more money you would do it Slow down your business. If you save money and use it to grow your business, you can take advantage of the opportunities in the market.

Dalio is correct in noting that investing that cash in stocks should grow your money much faster than say putting it into a savings account with a low-interest rate, particularly during the bull market of the last 10-plus years. However, Buffett's sitting on a colossal pile of cash is in part strategic — he’s waiting for exactly the right time to swoop in and make a big purchase when the price is right.

But are there really contradictory views?

So in effect, both are correct and it all comes down to the retail investor Dalio vs. an ultravalue investor like Buffett. When Dalio literally says “cash is trash,” he’s speaking more to retail investors and evidence suggests cash doesn’t provide positive real returns over a long period of time. He says investors should properly diversify their portfolio to lead to good returns no matter the macroeconomic and geopolitical conditions going on around the world.

However, Buffett is not a retail investor so his tactics are very different from the common everyday investor — like 99.9% of people reading this story. As you know, there is no right answer to this, it all depends on the companies you invest in and see if their financial philosophy fits you. This is what financial education is all about. You learn new money rules and use your financial education to grow your wealth.

As we had seen in the above discussion, cash is considered as trash in the investment world and cash is considered as the King in the business world.

If we don’t have the cash needed on hand, then we need to find that cash. Hence, cash is King. However, if we have idle cash or excess cash on hand, then we need to find a way to grow that cash by investing, directly or indirectly, into the marketplace to generate continuous cash flow and drive the appreciation of cash value.  

Going to schools and universities is great, but you'll learn more faster and appreciate the journey when you're out in the open and learning things on the go, either on your own, or you have a mentor to guide you on your financial journey.