My daughter is taking a high school personal finance course, and it comes up in conversation almost every day.
Overall, it’s pretty conventional stuff – save for the future, avoid debt, invest for the long term, etc.
While it’s sound advice for most people, I have a nagging feeling that it’s also a prescription for a small, narrow life, rather than an abundant one.
Yes, you can build a conservative portfolio augmented by savings, 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?
Once you realize the powerful and positive connection between debt, cash, and wealth – something I wish I realized three decades ago – your options expand significantly.
Money Is NOT the Root of All Evil
Let’s start with debt.
In many circles it’s considered evil, a source of many grievances in the world.
But think about it for a moment: Has anything great ever been accomplished without debt? After all, debt is the foundation of capitalism and the source of great wealth.
Consider the following:
- Donald Trump would be a Brooklyn clerk without debt.
- The railroads never would’ve been built, nor the Erie Canal or the Hoover Dam.
- America wouldn’t have won World War II.
- America’s great corporations would’ve stayed small businesses, if they survived at all.
- And very few Baby Boomers would’ve ever owned a home.
America would be but a shadow of itself.
Of course, I’m not advocating being reckless or betting the farm on a risky venture. One needs to be reasonable and intelligent, and we should always remain mindful that debt is a tool.
But as a rule, if you have access to debt – preferably corporate debt – at reasonable rates, then you should load up for property, a great value investment, or a solid business plan. It’s this debt that ultimately leads to cash.
Speaking of cash, it’s the second part of our equation. You can, of course, earn cash through work or income, by selling an asset, or by borrowing. It doesn’t really matter as long as you have it.
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Cash is very useful – especially if you want to buy something or you want to invest. Cash gives you options, flexibility, mobility, and, perhaps most importantly, peace of mind and patience.
It’s not a coincidence that these are the very characteristics of the world’s greatest investors and businessmen.
Now, what separates the tycoons from the grey flannel suits is how the great investors and businessmen use their available cash.
For example, most investors think they can handle market volatility, but the data shows that they tend to be panic sellers. In essence, most people end up selling their positions and exiting the market (raising cash) when they should be investing instead.
If these investors had the foresight to have ample cash on hand, they wouldn’t have panicked. Instead, they would’ve calmly scooped up blue-chip bargains, such as JPMorgan Chase & Co. (JPM) when it opened 20% down from its previous close.
Which brings me to the last part of the equation, wealth…
Words of Wisdom From the Greats
It’s important to keep in mind that all great investors have been value investors. This is why cash is king – having cash on hand ensures that you’re ready to pounce when opportunity knocks.
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’ve all experienced the frustration of finding a great investment opportunity without having the capital to take advantage. Capitalism is about connecting capital with opportunity. Those who have access to cash and, more importantly, the willingness to borrow cash after careful analysis, capture the opportunity and seize the day.
Learning how to use this connection to your advantage means the difference between living a comfortable life and living a profitable one.