Sunday, August 11, 2013

Buffett on cash

Warren Buffett, the largest shareholder of Berkshire Hathaway (NYSE:BRKA), once explained how investors should view cash. He said, “The one thing I will tell you is the worst investment you can have is cash.

Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don’t want to pay too much for them so you have to have some discipline about what you pay. But the thing to do is find a good business and stick with it.

We always keep enough cash around so I feel very comfortable and don’t worry about sleeping at night. But it’s not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future essentially.”

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Inflation is a major risk of cash. With inflation averaging 3 percent, the value of cash decreases over time. Over 10 years, your money is worth almost half of what it is worth today if only invested in cash. Cash is a great place to store your money for a short period of time until you make your next investment. Cash in itself should not be an investment. Warren Buffett says, “The one thing I will tell you is the worst investment you can have is cash.”

Cash has averaged a negative return. If you look at annual returns for the past 86 years and taking into account inflation and taxes, cash has returned -0.8 percent, where the stock market as returned 4.5 percent and bonds have returned 0.6 percent.

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