Sunday, March 9, 2014

Mark Spitznagel On The Importance Of Holding Cash

The Universa Investments founder reviews why it is important to maintain dry powder today for the investment opportunities coming when when the market "reprices itself" back to reality. He discusses how difficult that is in today's artificial world, saying that although you feel like an idiot holding cash today you will be very happy you did so when the music finally stops.



5 comments:

  1. How does this correspond to rocketing inflation, not just in the US but also around the world?

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    1. If you believe rocketing inflation is coming then you want to hold less cash. People like Mark believe that deflation will come first and inflation second.

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  2. Tuna, isn't inflation already here and building up rapidly?

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  3. In other words, make use of the upcoming deflationary window (how long will in last?) to invest? It might be essential to differentiate the types of cash one is holding. Mark is referring to cash for investment, which one might otherwise put into equities or properties, and judging by the insane levels both have reached, it would be a wiser investment to stay with cash right now. There is also cash for day-to-day expenditure that's separate to the investment funds. So one would not necessarily use the latter to buy groceries or a Porsche. Tuna, have I paraphrased this correctly?

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    1. In terms of time, the reflationary periods are usually long and drawn out. You get a slow and steady rise as assets begin to reflate, confidence comes back in, then investors begin to leverage up, then everyone begins to disregard the possibility that markets could ever possibly decline again. The deflationary deleveraging usually occurs over a shorter time frame because liquidations cascade on the themselves. The end of a reflationary period is the most frustrating time because you can see overvaluation everywhere yet it tends to go on forever. Psychologically people cannot handle this and they are drawn back into the market. Mark is building cash for the next deflationary decline. He is one of the very few out there with this strategy. This does not mean you need to be 100% in cash. It means if a hypothetical portfolio was structured 60% bonds and 40% cash, you could hypothetically move that portfolio to 33% cash, 33% bonds and 33% stocks.

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