Essay - Why Hold Cash?

[giofranchi]

I think Prem Watsa said something very interesting on the subject of this thread during the Q4 2014 Fairfax Conference Call. I quote:

we’ve had significant amounts of cash over the years long before we had hedges. But the way we get the cash, it’s a resultant. When we don’t see opportunity, we’re not trying to meet some quarterly earnings estimate that you or others might have and we’re looking at building our company over the long term. So when we don’t see opportunity with significant downside protection, then we’ve got to keep it in cash. And when we buy something, as we bought things in Greece, it doesn’t mean we are right. Sometimes we think there’s downside protection and it changes. But every time we buy a stock or a bond, we’re looking at protection on the downside. And right now, our view is there’s very little protection on the downside.

Protection on the downside… Given the fact all our investments depend somehow on what the market does, protection on the downside should be paramount in choosing what to buy or not to buy.

In this regard I think it is very difficult to invest without taking a look at the general picture too (at least some macro reasonings): for instance, a bank or an auto company might seem very cheap compared to its ttm earnings, only to discover that in a recession those earnings get halved…

 

Gio