Cash Is King…
“The depression had driven the over-encumbered rich, like Billy Durant, founder and president of General Motors, into the swelling ranks of the formerly rich. But for any with cash to invest the opportunities in 1921 were boundless.
Stocks were commandingly cheap. ‘Scores’ of companies were valued in the market at less than their working capital-as if the business itself, apart from the net cash, was worthless. The shares of ‘large numbers’ of industrial companies were selling at ‘one-third of their intrinsic value.’
Deflation took its toll on real estate as well as on stocks and bonds, to judge by a perusal of the New York Times classified pages… June 26, 1921 edition” (page 194 of James Grant’s The Forgotten Depression).
I used my Newspapers.com subscription and looked up the actual classified section of that day. I came across this:
An actual PICTURE advertisement. Not many actual pictures were shown in the papers back then. In fact, you could go through days, as I have, looking at the various newspapers and not find any pictures.
Yet, here we have a desperate homeowner willing to shell out big bucks to get out from under his home. Interesting, no?
Oh but we’re not even close to being done yet. Check this out.
Grant further writes “ On August 24, 1921, the low point of the Dow, many stock prices translated into multiples on 1923 earnings of less than five times. That held true for the steel companies but also the consumer-products companies that had enjoyed a relatively prosperous depression. Coca-Cola was valued at what would prove 1.7 times 1922 earnings with a dividend yield of 5.26%” (page 197).
Now, what’s the point here?
Simple. In a somewhat capitalist economy there will ALWAYS be the business cycle, i.e., ups and downs. There is no getting around this. Yes, some (seems more and more lately, sadly enough) will argue for government intervention to minimize the business cycle.
Unfortunately, the more government gets involved the more the business cycle is indeed reduced, but that is only because the downs are permanent. Socialism/Communism always means equality…in poverty, except for the few at the top of course.
But as long as we in the U.S. remain somewhat committed to a capitalistic society the ups of progress are permanent, with some temporary downs thrown in.
The temporary downs are where the real prosperity is made though. And how you do it is to have cash on the side. No, BONDS ARE NOT CASH EQUIVALENTS!!!
Bonds are Not Cash
Vanguard Long-Term Investment Grade Bond Fund(VWESX)
Above is the yearly performance of the Vanguard Long-Term Investment Grade Bond Fund (VWESX). It is up 21% year-to-date. Sounds good, eh? Again, not cash. It was also down 3 of the last 9 years.
So, if this was one of your cash-like equivalent holdings you proceeded to lose money 33% of the time this decade. Not cash.
TSP G Fund
The TSP G Fund is more like cash in that it always has a positive return. Similar to a Stable Value fund in your 401k plan, these funds will work just fine as a holding place while you’re waiting for things to tank.
To have access to the TSP G Fund or a Stable Value Fund, though, you need to work in a place where those are an option in your retirement plan.
What if you don’t? Well Certificates of Deposit or high-yielding savings accounts are your best bet. Bond funds that are up double digits in this low interest rate environment means they can be down as much too. Those are not places to hold cash.
Don’t get greedy here. You want LIQUIDITY in order to pick up stuff on the cheap when the inevitable crash comes. When that will be is anyone’s guess. But it will come. And those who have cash will be well-positioned to purchase a “Fine Suburban Home” for a bargain due to the “financial conditions of the owner”.
Is that being a parasite? Not in the least. The owner’s financial conditions were such because he was leveraged too high. That meant he lived large in previous years, years where you were biding your time, waiting for the inevitable to occur. He consumed. You deferred. Now you can take advantage.
Look at this house:
This was the first house Charlotte and I owned. We bought it in March, 1998 for around $100,000. I planted those two booming palm trees in in 1998 when they were about a foot tall each. Those suckers have grown beyond my wildest dreams.
Now look at this…
We sold it in 18 months later for $119,000. The lady who bought it from us sold it a few years later for $160,000. The value climbed all the way up to the mid-$200s in 2006-2007 when the folks who bought it in 2004 were refinancing to take equity out of the home, as MANY did back then. But in 2011 it changed hands at a foreclosure for $74k.
We had long since moved from Phoenix by then but in 2011 we took a family vacation for Easter back to Arizona. We showed the kids where we were married. Where Maddy was born. Where we used to live etc.
Upon driving by this house, I saw the front door was wide open. So, I parked the car and figured I’d go take a look and introduce myself as the first owner.
A nice, older man was there putting tile on the kitchen floor. We got to talking and turns out he was an orthodontist or some kind of high-end dentist. He essentially bought a block of houses in this neighborhood at foreclosure. He paid less than $80k for each…cash.
A year later, as you can see above, he sold this house for $125k, pocketing a nice profit of $50k, before expenses, obviously
The point though is that he HAD CASH! He was able to swoop in when everyone else was trying to swoop out and buy quality investments for a song. No one else was able to do that because no one else had cash. If you had cash you could call the shots.
Now, Redfin feels this house is worth $262k, up $137k over 7 years!
Seems high to me. But, I know nothing about the North Phoenix real estate market. So, maybe this is correct. If so, whoever bought this in 2012 for $125k has more than doubled their money in 7 years.
If my rule of 72 is correct, which it is, that means they’ve averaged a 10% appreciation per year. Not. Too. Shabby.
Moral of the story?
Cash is KING!!
If you’re interested in economic history…and who isn’t! 🙂 Here are some books to read: