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I read this article and thought it offered some interesting perspective. While having a mixed feeling about Cash, I want to know what TMF fellows think about this article and how do you think about cash in general?

--------------------The Article Itself from the WSJ--------------------

The Case for Cash
Once shunned, putting cash on the sidelines now looks shrewd to some investors. Brett Arends explains

A FRIEND WAS recently considering a potential investment for her portfolio and asked a simple question: Is it better than any of the alternatives that are currently out there? My answer surprised her: The real question is whether it's also better than any of the alternatives that you are likely to see in the next year or two.

For most mainstream investment professionals—including many of those with some pricey clients—that kind of an argument is near-sacrilege. It means, they say, trying to "time" the market. Their advice is usually along the lines of investing everything, everything, immediately, in the (high fee) products they make available. But this is flawed thinking. If the events of the last 15 years have shown anything, it is that turmoil and financial bargains seem to come along with great frequency. If there are no compelling opportunities on offer at the moment, wait a while. One will be coming along soon—in the next great panic about Europe, or emerging markets, or U.S. subprime mortgages, or gold, or China, or commodities, or high oil prices, or low oil prices, or inflation, or deflation or something else entirely.

Others may sing the praises of stocks, bonds, real estate and hedge funds. Let me offer qualified praise for the one asset which will leave you completely free to invest in the fire sale of tomorrow—the only asset that is truly considered a four letter word on Wall Street.


Earlier this year, James Montier, a member of the asset allocation team at GMO, the famously contrarian Boston investment firm, shocked members of the Value Investor Conference in London by revealing that the firm was now holding 50 percent of its mainstream portfolio in cash. GMO manages about $100 billion in assets, mostly for institutions and the wealthy. The reason, Montier said, was that the firm now considered most other investments to be too expensive. GMO warns that it considers all western stock and bond markets to be ominously overpriced, and that from current levels most investors are likely to lose money, after accounting for inflation, over the next seven or so years. While GMO still saw opportunities in some emerging markets, Montier said, it considers China to be in a dangerous bubble. In these circumstances, he concluded, the firm was holding a lot of clients' money in short-term paper while awaiting better buying levels.

Few may want to go half cash, but GMO, best known for its curmudgeonly chief investment strategist Jeremy Grantham, has a pretty good track record at calling disasters. Certainly, there is a good case for holding plenty of cash in a portfolio—even for the investor who doesn't share a totally bearish view of the markets.

It was the late Sir John Templeton, the legendary value investor, who pointed out that investors who held cash in an inflated stock market stood to gain in two ways. First, they would avoid losing money if stocks fell. Second, if stocks did fall they would then be free to spend the cash buying inexpensive shares—while other, less disciplined investors were often selling in a panic.

Andrew Smithers, a financial consultant in London (and another skeptic of today's stock prices), says one need not be a market timer to want to hold some cash. Even if you are managing a "passive" portfolio, he says, research has found that including some cash will reduce volatility much more than it will reduce returns. That's because even having, say, 5 percent or 10 percent in cash or short-term Treasury bonds will give investors the flexibility that Sir John Templeton praised. Interest rates are so low that clients won't be making money on such cash holdings. And they will miss out on any further gains in stock or bond markets. But if bearish predictions are correct, they will avoid losing money as well.

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Such arguments are unfashionable in much of the financial world. Conventional wisdom on Wall Street, as mentioned, advises clients to stay fully invested at all times in a selected "asset allocation" and warns against any attempt to "time" the market. Yet such advice should be considered deeply suspect, for three reasons. First, it is self-serving. Your financial advisers may be fine and decent men and women, but it remains true that even among the best, their first financial interest is not your wealth, but their own. To make money, they must charge you fees one way or another—and to do that without looking ridiculous they must invest your money in something other than cash. "My clients don't pay me to roll T-Bills," as a wealth adviser in Boston once candidly told me.

Second, the arguments against cash are mostly based on flawed data and thinking. For example, most financial advisers will roll out the hoary argument that money held as cash will miss out on the "best days" in the market, and if you had missed the 10 best days in the last 100 years you would have earned much lower returns. But the arguments go both ways. If you had missed the 10 worst days you would have earned much higher returns. Statistically, it's a wash.

Furthermore, the arguments are based upon a flawed premise—namely that markets basically exist in a reasonable equilibrium, so that attempts to "time" or "beat" them are pretty futile. Yet markets aren't always in equilibrium. Often, they're distorted, sometimes heavily so, with the result that individual assets are overpriced or underpriced. Yale University finance professor Robert Shiller has found that since the late Victorian era the returns from U.S. stocks over any given 10-year period have been strongly correlated with the relative valuation of those stocks at the start. Shiller measured the stock market in relation to the net earnings of the previous decade. The more expensive the market on this so-called Shiller Price/Earnings Ratio, the lower the returns. The correlations have been remarkable.

Similar results can be found using a measure called Tobin's q, named for the late Nobel economist James Tobin, which measured stock prices against the replacement cost of corporate assets. Based on both the Shiller P/E and Tobin's q, U.S. stocks are now very expensive. This doesn't prove medium-term returns will be poor, but it is serious grounds for caution.

Indeed, both stock and bond valuations today are actually explicitly a matter of government policy. Governments around the world for several years have been engaged in a massive enterprise to drive both higher with printed money, in the hope of stimulating the economy. Federal Reserve Chairman Ben Bernanke cited higher stock prices as evidence that his policies are working.

But as Bernanke winds down this policy, those investors who are fully invested in stocks and bonds may rediscover the virtues of the asset which dare not speak its name. Those who already hold some of their investments in cash may be thankful.
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