The way that most investors make money is off of stocks and the rising of value in their investment portfolio. For that reason, it’s easy to see how many investors would consider cash a waste. You aren’t going to be making any money off of cash stocks that are just sitting around. In fact, it’s a common perception in modern day investing that if you have cash sitting around, your financial advisor is not very good.
However, Warren Buffett has never gone with the flow when it comes to investing, and his stance on cash is nothing short of unorthodox when compared to the modern investing mindset. In fact, at any given time Berkshire Hathaway, Buffett’s company, has been known to have upwards of $70 billion cash on hand. But why?
Alice Schroeder, in her biography of Warren Buffett, sheds some light on this.
“He thinks of cash differently than conventional investors,” Schroeder wrote. “He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.”
Basically, while many investors see loose cash as funds that should be put to work, Buffett sees cash as potential that is already working. It’s unorthodox, but if you stop and think about it, it makes perfect sense. So much sense, in fact, that you’ll wonder why no one else is doing it.
By keeping cash on hand (rather than investing it somewhere immediately) a business is more able to change and adapt at a moment’s notice. This means that when a really good deal comes up out of nowhere, there is no scramble to try and make it happen. There’s not as much pressure, and the company, as a whole, is more secure. Sure, you’re not making money on it, but cash is an asset nonetheless.
And, as we can see, this unorthodox view on cash, has served Buffett well. Berkshire Hathaway, under his leadership, has grown exponentially and completed deals ranging from several million up to more than $20 billion. And, combined with his quick decision-making process, it seems only logical.