CASH is King

[Julia]

Julia, at times your logic falls in the domain of those that also may hold physical gold, but yet i suspect that may not yet be the case. Why?

Cheers,


CanOz

Probably a good and very logical question, CanOz. Best I can say in response is that I only put money in what I understand and I've simply never been attracted to learning about gold, or gold stocks for that matter.
Your question might prompt me to stir myself into taking more interest.
Cheers
Julia

 

[MR.]

Cash appears the King when you've lost just about everything. Later new investors will arrive and so the cycle starts all over again.

I understand what you mean. One assumes one has already lost! This is not the case at all here. Over the past 15 months including losses due to share holdings I am not ahead nor behind.

I like to look at the cash is king maxim a little differently, ie "liquidity" is king.

Are shares not liquid? Cash is still King

Cash is never "locked" away in a term deposit, you can draw it down any time you like , you just lose some interest in the adjustment if you take it early.

That is a point I made as well on another thread. Three years is a long time and perhaps too long, but I can break it. It also perhaps protects part of my assets which will not easily be caught in a bad decision. Next 2-3 years don't look good to me at all!

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No wrong or right here and trading is not my game.

 

[nunthewiser]

I always thought that the number one rule in ANY portfolio was to protect ones CAPITAL .......... if that means sitting on current term deposit larfable rates and waiting for a bit more safety out there so be it ......

 

[Julia]

I always thought that the number one rule in ANY portfolio was to protect ones CAPITAL .......... if that means sitting on current term deposit larfable rates and waiting for a bit more safety out there so be it ......

Agree with your No. 1 rule, but the problem occurs when that capital is what you use to generate an income. If deposit rates fall to 2%, that being equivalent to inflation, then you're effectively not receiving an income.

 

[MR.]

Agree with your No. 1 rule, but the problem occurs when that capital is what you use to generate an income. If deposit rates fall to 2%, that being equivalent to inflation, then you're effectively not receiving an income.

And is made worse by the interest being received is taxable.

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Interesting that if you invested 10,000 in 2004 in cash or Aord's the outcome is very similar just now.

The All Ord's investor was a lot richer at times and their cost of living (most likely) rose as a result.

 

[MR.]

Cash invested at say 5% will return 3.5% tax paid at 30 cents in the dollar.
A P/E of 28 guaranteed by our government.
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Instead we all pooled together and invested these funds into a company.

We purchase a company with our $50 million. (you're putting alot more in than me) We leverage that by 50% and turned our investment into 75 million.

The companies income less direct costs per year is $14.3 million.
From that we deduct
Overheads $3 million
Interest @ 10% $2.5 million
Repayment (15 years) $1.67 million
=========
$7.13 million left. After tax of 30 cent in the dollar = $5 million or a P/E of 10

The following has been my concern and continues to be.
Suddenly sales drop by 25% which results in the income less direct expenses dropping to $10.75 million. It dropped our fully franked profit down to $2.5 million. The P/E just blew out to 20. So the "Share price" responds and is now half back to a P/E of 10.

If the sales dropped by 50% our company is not making anything. Ofcoarse we tighten "overheads" and the government helps by reducing interest rates.
But we are on the verge of going under.
At this stage what is the share price?

Leverage is everywhere. Reading through the Storm thread. Leveraged people investing into the leveraged Storm. A double whammy.
But we still consider investing into Leveraged companies selling products to the highly leveraged consumers.

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On a side note: I would assume if the bank was strapped for cash at the time of attempting to break a term deposit they could refuse!
Which would be fair enough.

 

[nunthewiser]

Agree with your No. 1 rule, but the problem occurs when that capital is what you use to generate an income. If deposit rates fall to 2%, that being equivalent to inflation, then you're effectively not receiving an income.

yep totally agree re income .BUT does that validate sitting on a potential capital loss to collect the divies etc ?

tis one of those chicken and the egg kind of scenarious .

 

[robots]

hello,

and for those able to, optimizing/improving your income is where the CASH will roll in year after year

thankyou
robots

 

[Trevor_S]

I am utterly tired of seeing this Buffet quote repeated ad nauseam.

It assumes that people presently holding cash intend to do this for the long term (....."a terrible long term asset").

I don't take that quote as meaning that at all. Having Cash in a CMT that rolls over each month is to me indicative that you haven't made a decision and will reinvest when you feel comfortable with it and identify opportunities... which is considerably different to putting your cash in a 3 or 5 year fixed term deposit... to my mind that was what WB was on about... you obviously see it differently ?

If a lot more people had gone to cash a year or so ago, then there would a hell of a lot less misery and griping now.

Of course but those in misery are those who used inappropriate levels of leveraging or poorly thought through strategies. No way in hell did I even consider selling my WBC shares that I bought for $3 or my $18 BHP shares for example, the Dividend return on the WBC shares can't even come close to being matched by any term deposit.

My "strategy" is to accumulate enough shares for an excellent dividend stream for retirement (I am semi retired at the moment), I receive more in dividends then many people make as a wage and I still earn much more as a salary then I need to live from year to year, so I accumulate cash, then buy when I am comfortable, it's pretty boring to most people. I have been doing that since the very early '90's in my very early 20's. The work I do with investing is identify excellent companies and fair value, I am not that good at it though. I have had IP's over the years (and still have 1) so I am not immune to real estate but I don't make a good residential landlord.

 

[tech/a]

Hmm

Lets suppose you have 10,000 WBC share which had a value of $310,000
Now a value of $160,000.
$150,000 down the gurgler in a year.
Thats one hell of a lot of dividends.
Havent bothered with BHP.

While its a plan (The one you have) dont know its fool proof.

 

[noirua]

"CASH is King". But what cash? Australia is a small economy when all the worlds currencies are considered.
Sitting in the Aussie, especially in the last 12 months, has been bad news indeed for travelers. Unless you're holidaying in the very few destinations that are worse than the Aussie$, very few of them.

 

[MR.]

Having Cash in a CMT that rolls over each month is to me indicative that you haven't made a decision and will reinvest when you feel comfortable with it and identify opportunities... which is considerably different to putting your cash in a 3 or 5 year fixed term deposit. to my mind that was what WB was on about...

Warren Buffet 16/10/08:
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

Cash is a terrible long-term asset and I totally agree. However my 3 years is not 5 nor 10 either. Reading the article do you think WB was put up to it? Try and calm a few down?
BUY AMERICAN, I AM
No mistake where to buy!

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Here is a chart which I posted in the XAO thread a year ago.



The graph is the movement in the price of Australian shares less inflation over the past 80 odd years.

Observation by added RED line: Between Approx 1930 and 1980 (50 years) Australian shares as an average was equal to inflation.

Observation by BLACK and White lines: Is the range in the long term trend as I understood it.

We do seem to be in that long term trend range now at 3500.
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We have what 17 years expansion in Australia. (Your first trade was 18 - 19 years ago? WBC? $3-) What does the fine print always say? "Past returns are not any indication of future returns" Not trying to be smart we are both similar in age and I am a little out on a limb here.

Everyone for years has been drumming CASH is a waisted investment. Do many not preach buy "what is out of favour" Everyone keeps accepting leveraging. I never have!

What Financial Planner has ever told you to buy or just keep cash?

As for the invitation to compete with WB I take up the challange.
My 5.5% term deposit for 3 years will outperform the Dow / S&P over the same term from the 16/10/08.

 

[Julia]

yep totally agree re income .BUT does that validate sitting on a potential capital loss to collect the divies etc ?


tis one of those chicken and the egg kind of scenarious .

I don't see the potential capital loss as the only available option.
And will not buy anything for the dividends. These may well be cut if this mess gets nasty enough, as has already happened with some companies.

I've been doing some short term trades with BHP which moves in sufficiently large amounts to make it worthwhile. Somewhat of a departure from my previous longer term holds, but if I can generate a 10% gain on each trade using $100K each time, then that's OK.
And if the world falls over, then BHP is big enough to come back when it rights itself again.

 

[nunthewiser]

I don't see the potential capital loss as the only available option.
And will not buy anything for the dividends. These may well be cut if this mess gets nasty enough, as has already happened with some companies.

I've been doing some short term trades with BHP which moves in sufficiently large amounts to make it worthwhile. Somewhat of a departure from my previous longer term holds, but if I can generate a 10% gain on each trade using $100K each time, then that's OK.
And if the world falls over, then BHP is big enough to come back when it rights itself again.

ah ha but now we talking a different matter from what was first discussed , BUT you STILL are in cash ...just trading the short term moves for a hopeful faveourable outcome .i also trade for an income . my point previously was why would one flee from cash to investment in current climates and the fact that cash has outperformed MOST stock market investments since that buffet paragraph first started doing the rounds.

also are you saying that if your trade is not favourable ie goes up that you are willing to ride it out no matter how long rather than lose a portion of your capital as a stoploss ?if so, that will quickly put a stop to your " income " from trading as it will be parked up in the stocks until they come back to profibility/break even

 

[Julia]

I don't take that quote as meaning that at all. Having Cash in a CMT that rolls over each month is to me indicative that you haven't made a decision and will reinvest when you feel comfortable with it and identify opportunities... which is considerably different to putting your cash in a 3 or 5 year fixed term deposit... to my mind that was what WB was on about... you obviously see it differently ?

The quote says "cash is a terrible long term asset"
That doesn't indicate to me a CMT with reconsideration every month, but rather something you stuff away in a bank account and pretty much forget it because you're too afraid to take any risks. I know people who do this. They think the share market is like a casino.

Of course but those in misery are those who used inappropriate levels of leveraging or poorly thought through strategies.

No, it's absolutely not just those who used inappropriate levels of leverage.
It's the vast majority of the public who think "Super" is an investment of itself rather than a tax advantaged vehicle for holding assets. They didn't have a strategy and they simply didn't understand that their "Balanced Portfolio" was less safe than "Cash" so didn't ask their Super funds to switch them to the Cash option when the sky began to fall. Most of these people have lost about half their super balance in the last eighteen months.

It also includes people who were actually advised to switch to Cash about a year ago and who looked vaguely disbelieving and essentially chose not to take any personal responsibility.
Now they're crying.

No way in hell did I even consider selling my WBC shares that I bought for $3 or my $18 BHP shares for example, the Dividend return on the WBC shares can't even come close to being matched by any term deposit.

Well no, perhaps not. But did you consider locking in your profits when WBC was way higher than it is at present?

The 52 week range is $27 to $14.

If you'd sold at $27, having e.g. 1000 shares, then that's $27,000.
Less tax (if you hold them in a SF at 15%, if SF is in pension phase no tax.)

If you're holding the 1000 shares at present, at approx $15, then you have $15,000.
Difference of $12,000 which you could have used to buy about 800 more WBC shares approx at present price.

You're happy with the dividends. And yes, they are much better than bank interest at present. But:

Call the yield 10% and you get $1500 plus the franking credits.
Considerably less than your $12,000 profit in the previous example.

I know which option I'd be taking.

My "strategy" is to accumulate enough shares for an excellent dividend stream for retirement (I am semi retired at the moment),

so you'd be able to utilise the T.R.A.P. option and save on tax?

I receive more in dividends then many people make as a wage and I still earn much more as a salary then I need to live from year to year, so I accumulate cash, then buy when I am comfortable, it's pretty boring to most people.

Fair enough. Why bother going to any trouble to make more money than you need.

 

[Julia]

ah ha but now we talking a different matter from what was first discussed , BUT you STILL are in cash ...just trading the short term moves for a hopeful faveourable outcome .i also trade for an income . my point previously was why would one flee from cash to investment in current climates and the fact that cash has outperformed MOST stock market investments since that buffet paragraph first started doing the rounds.

OK. I don't have any argument with what you're saying.
And yes I know the thread title is "Cash is King" but I've assumed the thread was started to discuss options for making the most of difficult choices.
So if falling interest rates mean that cash of itself is no longer king for now, then we need to consider alternatives.

also are you saying that if your trade is not favourable ie goes up that you are willing to ride it out no matter how long rather than lose a portion of your capital as a stoploss ?if so, that will quickly put a stop to your " income " from trading as it will be parked up in the stocks until they come back to profibility/break even

I wouldn't do it with some penny stock. Using e.g. BHP is essentially similar to having a long term hold but just making some profit in the meantime.
And yes, I'd hold until there was a profit. The yield of 3.2% with 100% franking is probably better than cash deposit rates will be in a month or so.

 

[MR.]

So if falling interest rates mean that cash of itself is no longer king for now, then we need to consider alternatives.

If share prices keep falling, even at 0% interest rates "Cash is still King!" But other alternatives could be the likes of eg: gold.

Using e.g. BHP is essentially similar to having a long term hold but just making some profit in the meantime.
And yes, I'd hold until there was a profit. The yield of 3.2% with 100% franking is probably better than cash deposit rates will be in a month or so.

So no stop loss!

BHP:
75 billion in assets
36 billion in Liabilities
Earnings per share of 9.4%
P/E of 10

(BHP the market darling?)

12 month high of $50- and is $30- now. (Is it a warning that BHP was $30 in 2007?)

Isn't BHP just like the example I gave above as an alternative to cash?

The question is:
Is CASH King while the mass’s carry heavy debts?
Maybe I've just lost the plot.

 

[nunthewiser]

So no stop loss!

BHP:
75 billion in assets
36 billion in Liabilities
Earnings per share of 9.4%
P/E of 10

(BHP the market darling?)

12 month high of $50- and is $30- now. (Is it a warning that BHP was $30 in 2007?)

Isn't BHP just like the example I gave above as an alternative to cash?

The question is:
Is CASH King while the mass’s carry heavy debts?
Maybe I've just lost the plot.

No you havent lost the Plot , i do not think much of julia's above plan either .as as she quoted earlier divies DO get cut etc etc .
No stoploss whilst trading in THIS arena currently could see ones capital tied up for an awfully long time
But each to there own and good luck to her , hopefully its only wins she gets while trading BHP

 

[mayk]

 

[Julia]

No you havent lost the Plot , i do not think much of julia's above plan either .as as she quoted earlier divies DO get cut etc etc .

Now let's have a reality check here: I don't think anyone would be buying BHP for its dividend at about 3%. I merely made mention of it in comparison to what deposit rates are likely to be very shortly.

No stoploss whilst trading in THIS arena currently could see ones capital tied up for an awfully long time

Another reality check: I'm doing this with a very small proportion of my capital, such that I'd be entirely happy to keep in BHP for the next couple of decades. Most of it will remain unprofitably tucked away in the bank.


I'm very conservative but believe in these times we need to be prepared to look outside our traditional views and practices.

And thanks for the good luck wishes (whether sincere or not). I've never been much of a believer in luck actually, and doubt that it was luck that allowed me to be self funded many years before most people are starting to think about retirement.

And btw, nun, what's your own survival strategy in these times?