Episode 151: Cash Equals Options

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This week Steve, Tom and Jacob open with three headlines that are more connected than they look: Iran calling for resolution under the weight of sanctions and inflation, the link between immigration and wage suppression in Australia, and house prices falling across every capital city except Darwin.

The CoreLogic numbers for August tell the story. Sydney down 4.7% for the quarter, Melbourne down 3.9%, and commentators now calling for falls of 10%. The quarterly picture is negative almost everywhere, and the annual gains in Brisbane, Perth and Adelaide are shrinking fast.

From there the conversation turns to one of the most misunderstood positions in investing: holding cash. Most investors feel like they are losing by sitting in cash, but it is the opposite. Cash equals options. It is exactly how Warren Buffett was able to extract a 10% preferred dividend and warrants at $8 from Bank of America during the GFC. That deal was only available to the person with the money when nobody else had any. Buffett made $500 million on the dividends alone.

We also walk through why buy and hold fails when you measure returns across a full market cycle, from low point to low point. The secular bull from 1982 to 2000 delivered 666%. The bear market that followed wiped out 59% of it. Once you add fees, inflation and tax, the full cycle return was close to zero.

And then the part that changes how most people think about property versus stocks: rebalancing. You cannot rebalance a house. If it falls 20%, you sit and hope. With a diversified stock portfolio you can harvest winners and add to losers, and the maths show that rebalancing turns a flat market into a positive return. We walk through the example with two assets, one up 25% and one down 20%, and show how the rebalanced portfolio gains over 5% while the buy-and-hold portfolio gains nothing.

This is why we think stocks are a better long-term investment. Property will have its day, but over time the ability to rebalance between uncorrelated assets leads to higher compound returns.

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Steve, Tom and Jacob
Total Money Management

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