Keep Some Dry Powder

Hold enough investable cash that a 50% market decline feels to you like an opportunity, not a dagger in your belly.

Investors who have cash are able to buy while blood is in the streets. They are able to buy when panic (deserved or totally bogus) has taken hold, whether that panic is about a virus, the climate, terrorists, war, or inflation and currency collapse.

Having investable cash is keeping your powder dry.

Dry powder (cash or cash equivalents) is an investment in its own right. It’s an option without an expiration date: the option to buy great assets at panic prices wherever and whenever that panic occurs. That option has real value. And right now, with the Strait of Hormuz closed, potential global liquidity collapse, the Fed hoist by its own petard, and the markets raging along as if black swans are never born, that cash option is likely to garner a high return financially and psychologically.

The question isn’t whether to hold cash. It’s how much, in what form, and how to make it work while you wait.

First, a separate issue from dry powder: Survival Money. The first thing we recommend is that you put aside enough cash, cash equivalents and readily accessible credit to carry you though a year of shit hitting the fan. Calculate what you need to survive for a year with all luxuries deferred. That’s survival money and it is not part of your investment portfolio.

Dry Powder Is Part of Your Investment Portfolio

The dry powder needs to be a portion of your investment portfolio. It’s a portion that, for most people, has lower returns but serves as a liquid capital source with which to earn more income in the future.

A 30-year-old with steady income and a long time-horizon can hold less cash than a 60-year-old protecting capital. The right number is personal, and it changes as your personal assessment of the global risk levels change. If you think that global risks are high now, it’s time to check on your cash position and consider growing it with thoughtful efforts to sell some of your winning positions and tuning your portfolio. Do this before the next panic comes.

A 30-year-old with steady income and a long time-horizon can hold less cash than a 60-year-old protecting capital. The right number is personal, and it changes as your personal assessment of the global risk levels change. If you think that global risks are high now, it’s time to check on your cash position and consider growing it with thoughtful efforts to sell some of your winning positions and tuning your portfolio. Do this before the next panic comes.

If you would like a starting point to help you decide how much of your investment portfolio should be in cash this week, well, we can’t give individual advice and this is a highly personal decision. But we can suggest that 30% is a good place to start in your thinking process. We can also suggest that if you are investing on margin, the dagger waiting to go into your belly is long and sharp.

But, you say, cash doesn’t earn any return, and loses to inflation?

Sure, but it doesn’t have to. Here at Crisis Investing, we don’t use only standard thinking. With your dry powder and your weekly gut assessment of global risk levels, you can easily earn a lot higher return on your cash by selling far out-of-the-money PUT options (not buying them). We’ll happily teach that method in our coming letters to you. It’s simple, and once you get the hang of it, you will see anyone can do it in a few minutes per week. For now, just think about expanding your cash position. We’ll come back to selling options over the next weeks and months.

The Current Setup

Right now the macro backdrop is damn uncertain. Holding some cash isn’t timid. It’s wise positioning. Your investments should pay you, not make you anxious. Accumulating dry powder is you taking pay from your investments and speculations, while leaving that new cash in your portfolio.

Flush Fear of Missing Out (FOMO) down the toilet. Instead, think of holding cash as ready capital. Think of it as power. Think of it as freedom to operate.

Crises, real or perceived, come with increasing frequency in the fast-moving world of today.

Over the next few weeks and months, we will be examining the Crisis Investing Portfolio for opportunities to generate some more dry powder for our paid subscribers. Because it’s time to keep a lot of powder dry.

Sincerely,

John Hunt, MD

P.S. No I don’t trust the US Dollar, which is what most Americans mean by cash. What the US Dollar has is network effect, momentum, inertia, easy exchangeability, and a world full of people foolishly confident in it because most of them are saddled with even crappier fiat currencies. You can hold your cash equivalents in whatever is your happy space, perhaps some combination of US dollar instruments, bitcoin, gold and silver.