My daughter took a high school personal finance course. It’s conventional stuff – save for the future, avoid or manage debt, and how to invest for the long term.
I guess it is pretty good advice for most, but I have a nagging feeling that it is also a prescription for a small, narrow life rather than an abundant one. Yes, I know you can build a conservative portfolio augmented by savings and hold on to it for 40 years and, with some luck, it may become a very nice nest egg - but where’s the adventure in that?
And while some may say that a debt-free life is a low-stress life, I can’t think of anything more stressful for anyone than to have a low ceiling on ambition and achievement.
In short, looking back, what I dearly wish I had realized three decades ago, is that there is a powerful and positive connection between how you invest, manage debt and cash, and wealth.
Let’s start with debt. In many circles, it is the source of all that is evil in the world.
But think about it for a moment. Has anything great ever been accomplished without debt? No question - debt is the foundation of capitalism and the source of great wealth.
Donald Trump would be a Brooklyn clerk without debt. The railroads would never have been built nor the Erie Canal or the Hoover Dam. America would never have won World War II. America’s great corporations would have stayed small businesses if they survived at all. Very few baby boomers would have ever owned a home. America would be but a shadow of itself.
Now I might add that the current trend in U.S. government spending and the ongoing struggle to manage debt is alarming. The national debt has gone from about 30% of GDP in 2000 to about 100% of GDP in 2022. This must change because as they say, “the chickens will come home to roost” eventually.
So, I’m not advocating being reckless or betting the farm on a risky venture. One needs to be intelligent and think things through. The current high interest rates have to be taken into consideration. It’s almost always better to set up a corporation and borrow rather than take out personal loans. But if you have access to debt at reasonable rates for a home, a great value investment, or a solid business plan, I say get as much as you can get.
This leads to cash. You can of course earn cash through work or income, through selling an asset, or you can borrow it. It doesn’t really matter if you have it.
Cash is obviously very useful - especially if you want to buy something or invest in something. Cash gives you options, flexibility, mobility, and perhaps most importantly, peace of mind and patience.
And aren’t these the very characteristics of the world’s greatest investors and businessmen? What separates the tycoons from the grey flannel suits?
For example, most investors think they can handle market volatility pretty well, but the data shows they tend to be panic sellers. In essence, they are raising cash when they should be investing it.
If these investors would have had the foresight to have an ample cash position in hand, perhaps they wouldn’t panic but would be calmly scooping up blue-chip bargains like JPMorgan Chase (JPM) or Johnson & Johnson (JNJ), down sharply so far in 2022.
It is important to keep in mind that all great investors have been value investors, which is the best reason on earth that you should keep liquid, so you are ready to pounce.
As Howard Marks of Oaktree put it; “investors face not one but two major risks: the risk of losing money and the risk of missing opportunities.”
Warren Buffett puts it differently, “…when great stocks are on sale, you need to back up the truck of cash rather than use a thimble.”
We all have experienced the frustration of finding a great investment opportunity but not having the capital to take advantage of it. If only I had a million dollars, we say to ourselves.
Capitalism is connecting capital with opportunity. Those that have access to cash and, more importantly, the willingness to borrow cash after careful analysis based on the best intelligence, capture the opportunity and seize the day.
This is the way it is, and this is the way it will always be.