Every market bubble has a final phase when investors are all in. The last skeptic has thrown in the towel and joined the crowd bidding stock prices higher.
Sentiment is dominated by “FOMO” (fear of missing out) and positive momentum. The last naysayer is mute and stocks just go higher.
We’ve seen this scenario time and again. Yet even in these euphoric episodes there are one or two voices either sounding an alarm, or perhaps just biding their time. They know the bubble will end soon. They know the crash will be brutal. Most of all, they know that cash is the most valuable asset to have.
Cash will not lose value in a crash. If deflation ensues, it will actually gain value; you’ll get more for your money when prices are dropping. Most importantly, cash allows you to step back from the carnage, take a deep breath and go shopping for bargains when everyone else is desperately selling and trying to get their money back.
Of course, the player on the sidelines with cash is subject to ridicule. An extreme version of this is described in this article.
Stock markets are on fire right now with new highs being reached almost every day. Yet the most famous investor of the past 50 years, Warren Buffett, is on the sidelines with $128 billion in cash.
One would think that Buffett would be immune from ridicule, but that’s not the case. The bull market bullies are mocking the Sage of Omaha for “missing out” and hoarding a ridiculous amount of cash.
Among the many signs of a market top, the ridicule of rookies aimed at a master investor is one of the most telling. Buffett knows what’s coming and he’s ready. His portfolio will have little volatility in the short run (that’s what cash does) and he’ll be ready in the slightly longer run when overleveraged suitors with crashing valuations come calling.
You can be all in stocks right now. Or you could mimic the master and have a larger than normal allocation to cash. My money’s on Buffett… and cash.
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