Blog 9 - Cash as a Strategic Weapon

"Money is a tool. Used properly, it makes beautiful things. Used wrongfully, it makes a mess."— Bradley Vinson, Advocate, Speaker, Coach

Cash is often the most mismanaged asset in our portfolio. How it is accumulated, how it is invested, and how it is deployed usually all can be improved upon. Further, the true strategic value of cash is often miscalculated.

Cash is most thought of as a neutral asset class—essentially a haven from market uncertainty. While that is one truth, cash's true value is not the interest that it earns today but rather the opportunity cost of allowing compelling investment moments to pass us by.

Note: This blog assumes cash is intended for long-term investing purposes, not held for liabilities or lifestyle needs.

Further, the actual management of your cash management should not be passive. Consider three active portfolio concepts to render your cash management more effective:

1. Accumulating Cash

2. Generating Returns with your Cash

3. Deploying Cas

1. Accumulating Cash

Building up your reserve cash should be a steady, ongoing priority. The actual amount accumulated will depend on the length of time between market events. The real merit of a reserve is directly tied to your discipline to accumulate, then deploy cash during compelling market pullbacks. Otherwise, hoarding cash just becomes a drag on performance.

While for retirees, cash is a finite resource to be managed sparingly, for the employed, it's renewable. Yet for all, new cash can be accrued through explicit portfolio management techniques.

Six Techniques to Build-up Your Cash Reserve:

1. Dividends and special dividends paid by core stocks

2. Trimming advancing stocks and retaining cash as a reserve

3. Income paid by short sellers to borrow shares from your portfolio¹

4. Premiums received by selling low-risk monthly Covered Calls

5. Premiums received by selling Put contracts on discounted non-core stocks

As the economy moves through its cycle, focus on growing your cash position but guard it jealously.

Don't let FOMO steal your cash MOJO on non-compelling trades.

Bonus: Raising USD Cash Without FX Fees

In margin accounts, as a Canadian investor, if you don't already own USD or would like to increase your US cash, USD can be generated without ever exchanging CAD for USD. Premiums paid to you on the sale of US Put and Covered Call contracts are paid into your account in USD. Plan ahead for your next vacation cash.

2. Generating Returns with Your Cash

Cash sitting idle earns what the banks will pay—passive yield. Yet the return on cash can be improved through active management.

a) Passive Yield

i. Your brokerage platform should offer an interest rate competitive with bank accounts, money market funds, and T-bills. But not all do. The Interactive Brokerage platform tends to be the most generous.

b) Active Yield

i. Selling OTM SPY ETF Put Contracts - While sitting on idle cash generating 3-5% passively, consider selling short-term (1-3 month) deep OTM (15-20% Strike Price discount) SPY ETF Put contracts. These contracts generate premiums to augment your passive cash returns. If the SPY is below the Strike Price by maturity, the position will be exercised. You still keep the premium. Cash will be disbursed from your account to purchase the SPY ETF at the Strike Price. By setting a deep Strike Price and reasonable maturity date, the probability of exercise can be reduced significantly. Higher premiums can be generated by choosing a series of shorter time horizons rather than one longer term.

ii. Selling ATM/ITM Put Contracts on Core Stocks - Similar to the above, target ATM/ITM Put contracts on specific stocks not yet fully allocated. Since cash is earmarked for allocation to these stocks, by setting more aggressive Strike Prices, you receive more attractive yields.

ARK Warning

The ARK Investment Funds have a policy to remain fully invested. When the desired investments are not good value, the funds deploy their cash into 'FANG' stocks as proxies for cash due to their relatively consistent growth profiles. This is called "Cash Equitization". Since ARK's investment horizon is effectively perpetual, they can afford to take such risks.

3. Deploying Cash

When compelling investment opportunities arise, the true worth of your cash management discipline will finally be measurable—both from potential IRR (rate of return) and the emotional satisfaction to seize an investing opportunity.

Yet, when those moments arrive, it's not the time for soul-searching. It's a time for action. If the cash reserve is never deployed opportunistically, the value of cash to an investor is merely the passive amount banks are willing to pay to use that cash.

The Behavior Problem

As a reminder of how retail investors typically deploy cash, Figure 1 reveals the skittish behavior of investors as they respond to the behavioral cues of greed and fear. The red and green bars highlight the rush of retail cash in and out of the stock market (the MSCI All-World Index) juxtaposed with prevailing market performance (black line).

If investors were genuinely prescient capitalists, cash flows would be diametrically opposite, not concurrent, with market performance trends.

Figure 1: Chasing Performance

Source[2]

Summary

As part of this ongoing educational series to manage your portfolio more effectively, cash—as the primary tool of capitalists—should not just be a passive asset. Instead, it should be concertedly accumulated, multiplied, then deployed discerningly.

With a market correction/bear market occurring on average every 4 years and sporadically in between, the focus should be on building-up your "dry powder" in anticipation of the next compelling opportunity. It will be coming.

Cash Management Techniques

If you'd like to explore further into contrarian cash management ideas, Chapter 18 of The Investing Oasis offers more detailed tools, tactics, and examples.

"Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."— Warren Buffett

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Resources:

• The Investing Oasis - Chapter 18: "Contrarian Cash & Leverage"

Footnotes:

1. Many brokerage platforms allow investors to lend shares to short sellers for a fee ↩

Jay T. Mason, CFA, CFP manages the Oasis Growth Fund and is the author of

“The INVESTING OASIS: Contrarian Treasures in the Capital Markets Desert”,

as well as the blog series: ‘More Buck for Your Bang’.

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The Oasis Growth Fund is Series O of the Fieldhouse Pro Funds Inc trust series available by Offering Memorandum in Canada through select Financial Advisors. This education series is not intended as a solicitation for investment in the Oasis Growth Fund nor is it sponsored by Fieldhouse Capital Management Inc.