Saturday, March 13, 2010

Cash Is King

The Snowball: Warren Buffett and the Business of LifeWhen you don't have cash and you want something, how do you get it? Credit. When the credit goes away you cannot get what you want. But can you have too much cash? I was interested to read a recent article from Yahoo! Finance about how firms that hunkered down during this recession and cut costs, possibly even laid off portions of their workforce, have been hoarding their cash and saving up. Sounds about like the rest of us. We stop going out as often, we are actually saving up instead of putting everything on plastic. As the wants have diminished the economy has shrunk to match it.

Were we too afraid? The Oracle of Omaha, Warren Buffett, would probably think so. Instead of hunkering down and waiting for the storm to pass, he stepped right out in the middle of it. When we started saving like mad in our 1% or less savings accounts, he started shoveling the money out the front door. Has he gone crazy? Nope. He is sticking to his guns. Be fearful when others are greedy and be greedy when others are fearful.

During the economic meltdown, Buffet went out and spent money like mad buying up Burlington Northern Santa Fe, Goldman Sachs, and GE. Meanwhile, financial advisers everywhere where telling people that 'Cash Is King'. Unfortunately, while it is true that 'Cash Is King', most people were learning too late.

The Warren Buffett Way, Second EditionAnyone who took Mr. Buffett's advice and invested in the stock market in October 2008, (think ultra-scary times) even through a simple index fund, is up about 25%.  The key to getting ahead like Buffett is to already have that cash on hand. The good principles were already in place so that when savings rates tumbled to 1% Buffett didn't jump up and finally open a high rate savings account. He instead took it out of the account and spent it and spent it well.

Read more tips from the Oracle of Omaha here.

Last year I personally was low on cash and inwardly I wanted to follow Buffett. While I did fund my Roth IRA for the year and am amazed by its one year returns, I often felt like I wanted to do more. However, my wife and I had set a personal goal to tackle the student loans. I am still glad we did because now we can afford our new rent payment while we wait for our house to sell. 

Tell us about your story with cash in the comments below.

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