In today’s uncertain and tumultuous market, we often hear about savvy investors like busy professionals, entrepreneurs, and business owners, sitting on the sidelines hoarding cash. The assumption is that they’d rather sit on cash than risk losses in a volatile market. But, if you dig a little deeper, you’ll find that these savvy investors aren’t hoarding cash out of fear, but are actually on the hunt. Warren Buffett is one such investor.
In its recent third-quarter earnings report, Berkshire Hathaway reported a $157 billion cash reserve, a record for the company. Why is Berkshire Hathaway sitting on so much cash? It’s likely that Warren Buffett smells blood in the water.
Nathan Rothschild, a 19th-century British financier and member of the Rothschild banking family, is credited with saying that “the time to buy is when there’s blood in the streets.” Buffett has his own spin on this investment philosophy. “Be fearful when others are greedy, and greedy when others are fearful,” Warren Buffett once said, which embraces this going against the grain investing approach.
So, while many investors are sitting on the sidelines waiting for the markets to settle, sophisticated investors are just waiting to pounce. Warren Buffett is sitting on cash because his focus is on investing. He’s waiting for that next big opportunity. A mountain of cash allows him to take advantage of short-term windows of opportunity and, most of all, with a large enough bankroll, it gives him the flexibility to buy out or shut down companies at will in the interest of maximizing his company’s portfolio performance.
Buffett’s intentions with all that cash were recently confirmed by his longtime business partner and friend, Charlie Munger, who said there is “at least a 50/50” chance the pair will complete another major acquisition in the near future in an interview last week with The Wall Street Journal. Buffett’s approach to cash is representative of how sophisticated investors, like busy professionals, the ultra-wealthy and institutional investors approach it. It’s essentially a tool to be used to attract more cash.
In the world of private investing, there’s the term “dry powder” that’s often used to refer to cash reserves held by investors like ultra-wealthy individuals, venture capital firms and private equity funds that they keep on hand to take advantage of promising private investment opportunities. They basically keep this dry powder for bargain hunting. There are companies and websites that actually keep tabs on the amount of dry powder that investors are keeping on hand. And according to McKinsey & Co., the current amount of dry powder which is estimated at around $374 billion, is at a record high level.
The high level of dry powder currently being held by sophisticated investors is a sign that they sense an opportunity. Instead of shying away from investing in the face of an uncertain and volatile climate, they’re itching for the next opportunity.
Sitting on cash to avoid losses is counterproductive as inflation chips away at that cash. Many high-net-worth investors (HNWIs) are sitting on cash for the wrong reasons.
Most HNWIs are busy professionals and many of them are sitting on cash for the wrong reasons. Many don’t think they have many options in an uncertain investing environment. They are business owners, c-level suite execs, medical professionals, attorneys, accountants, academics, and insurance professionals, who have constant demands on their time. And what I’m finding with many of these busy professionals is that their cash accounts are consistently around 10% of their portfolios – just sitting and doing nothing but getting eaten away by inflation.
Why do busy professionals consistently sit on cash?
They do not have the the resources that Warren Buffett has in spades: time, access or the bankroll. What many of these busy professionals don’t understand is that there is an alternative to what they’re used to. They’re used to putting their portfolios on autopilot in a 401(k). They would love to do with their cash what Warren Buffett and the wealthy do and invest in Wall Street alternatives, but they’re hesitant because of the lack of time, capital and knowledge.
Here’s a secret:
Many of the ultra-wealthy who have achieved financial independence were also once busy professionals who lacked the time, access, capital and knowledge to invest like Warren Buffett.
However, once they discovered opportunities in private investing to pool their capital with other like-minded investors, they could overcome the capital, time and knowledge obstacles by partnering with experienced professionals who did all the work for them.
You don’t have to let your money waste away in a bank account. You can put it to productive use by leveraging the expertise of seasoned professionals to invest in a cash-flowing alternative asset like commercial real estate or a productive business like the ultrawealthy do.
Partnering with experts by investing in a private fund or syndication allows busy professionals to put their cash to work without the obstacles of time, capital, access and knowledge standing in the way.
