Cash Is Not Trash

Barron’s had an article over the weekend about Jim Stack, the money manager and newsletter writer from Montana. I’ve mentioned Stack several over the years, referring to his article from Smart Money Magazine in 1993 where I first bought into the potential significance of the 200 DMA as a defensive strategy. Although I don’t read much from him or about him some of the concepts addressed in the Barron’s interview play a prominent role in client portfolios, and my own.

Stack calls his method Safety First. If this is new to you, the big idea is that over the long term you can outperform the market by avoiding the full consequence of large market declines. In the past I've referred to John Serrapere's strategy of 75/50 which is trying to capture 75% of the upside with only half of the downside, and also John Hussman's targeting results over a full stock market cycle in terms of different ways to come at this idea.

Stack's ways of looking at the market for clues of impending trouble has a lot of moving parts, potentially, so you should read the article if you want more detail. One thing in there that I think is important and have mentioned before is Stack's willingness to have a large cash balance at times. People get impatient with cash and I've never really understood why, not completely anyway. Yes some element of behavior wants money always to be working, trying to earn a return but quite simply there is a balance between risk and reward. This balance changes and understanding it changes is a contributing factor to long term success.

In past posts I've (half) joked that the market is a lot less likely to drop a lot after it has dropped a lot. The point being it doesn't have to be rocket science. The 200 DMA most certainly is not rocket science, it warns of a possible problem. Sometimes the problem is serious and sometimes it is not but occasionally it is serious in when that is the case raising cash, even a lot of cash, would seem to make a lot of sense.