Keep in mind what happened during this period. The Dow Jones fell 89% from 1929 to 1932, and unemployment shot to 25%. Those without enough cash to endure were forced to liquidate assets for pennies on the dollar. Then the market rose almost fivefold from 1932 to 1937 in the biggest five-year rally in history. Several blue-chip companies increased 10 or 20 times over. Those without cash (and guts) saw the greatest investment opportunity of their lives waltz right past them.
Roth was fascinated with the stock market, and how smart people could be destroyed by it. He repeats, over and over again, a simple investing lesson obvious to everyone who lived through the depression: the incredible value of having ample cash in the bank.
July, 1931: "Magazines and newspapers are full of articles telling people to buy stocks, real estate etc. at present bargain prices. They say that times are sure to get better and that many big fortunes have been built this way. The trouble is that nobody has any money."
Dec., 1931: "It is generally believed that good stocks and bonds can now be bought at very attractive prices. The difficulty is that nobody has the cash to buy."
July, 1933: "Again and again during this depression it is driven home to me that opportunity is a stern goddess who passes up those who are unprepared with liquid capital."
Keep in mind what happened during this period. The Dow Jones fell 89% from 1929 to 1932, and unemployment shot to 25%. Those without enough cash to endure were forced to liquidate assets for pennies on the dollar. Then the market rose almost fivefold from 1932 to 1937 in the biggest five-year rally in history. Several blue-chip companies increased 10 or 20 times over. Those without cash (and guts) saw the greatest investment opportunity of their lives waltz right past them.
This story repeats itself throughout history, just not as severe. During booms, all people care about is return, and complain about how worthless cash in the bank is, earning a puny yield. During a crash they realize that nothing is more precious than cash in the bank, even if you had to sit on it for years earning that puny yield.
We're doing this again today. So many are livid that their cash in the bank earns no more than 0.01%, losing money every day to inflation.
I think this is a terrible way to think about the value of cash, and it causes people to chronically underestimate its real worth. Cash doesn't earn much today, but it gives you options in the future. Over time, that potential can more than offset the dismal yield earned today. If earning 0.01% today allows you to become a financial vulture in a future market crash -- or avoid becoming a desperate seller -- then you're really earning far more than 0.01% on your cash today. It's hard to convince some people of this, because all they see is the advertised 0.01% return. But having options has real value. "Cash combined with courage in a crisis is priceless," Warren Buffet once said.
