Separating the Wheat From the Chaff: Cash Is King Again

As a fallout to the pandemic, one thing has changed for sure-investment strategy
Separating the Wheat From the Chaff: Cash Is King Again
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Co-Founder & Partner, Fintrust Advisors
3 min read
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What is a foolproof pandemic portfolio? Well, that is a million-dollar question and even I am curious to know how it looks like. 

In the last three months beginning March, engines of growth across economies have paused leading to unprecedented gross domestic production contraction. Though countries are slowly coming back to new normal and reopening their economies, and India too has now begun to unlock the economy, there is still a lot of pain expected in businesses of varying sizes and industries. As far as the trajectory of this crisis is concerned, it is still early days to determine the long-term implications of this crisis and hence the coming 9-12 months are going to be extremely critical. 

As a fallout to the pandemic, one thing that has changed for sure is the investment strategy. Those days are left behind for investors when valuations were running high basis the future ambitious revenue projections. Now, at least for the medium term, the investor’s community across will prefer the companies with actual cash flows and near-zero debt levels. 

There is a lot of churning happening of the investor’s belief from ‘cash is trash’ to ‘cash is king’ in less than three months. From arguing ‘cash is trash’ and calling it to be imprudent to sit on large amounts of cash, the strategy has shifted to cash conservation terming it ‘cash is king’ again. Idle cash sitting on the balance sheet and comfortable cash position will enable businesses to wither this crisis relatively better than those with lower cash reserves. 

Here are some of the parameters one may look at to build on to one’s portfolio, and to separate the wheat from the chaff.

Proof of earning is always in what businesses do with those earnings. Such corporates will freeze capex, conserving more cash; this would not be looked like a lack of vision for the future but vice-versa.

Businesses’ prudence in managing the cashflows. Good businesses will estimate several months in advance their individual cash positions to battle out the crisis.

Businesses with lower or negative cash conversion cycle, and prudent working capital management

Businesses with a history of high dividend. They may have curbed on the dividends in today’s time, but they will eventually pay hefty dividends in the future.

While it is pertinent to look for the businesses with sound cash position, alternatively, investors should also keep ‘cash’ in their portfolio as well. In Warren Buffett’s words, “Cash too has real value, as with many other aspects of investing. Cash is not just an asset class that is returning next to nothing. It is a call option that can be priced.” Hence, when that option is cheap relative to the ability of cash to buy assets, it is prudent to allocate some part of the portfolio in cash or cash equivalents, even if the interest rates are not so lucrative. Individual investors should not be fearful to hold cash, even when it is earning not much, especially in today’s highly uncertain times as it is available to them when needed most. Cash is king again and is as an effective weapon for building a prudent investment portfolio.

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