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Why you should take a leaf from Warren Buffett's book and have cash on hand

by , 13 August 2014

Last week, Warren Buffett's holding company Berkshire Hathaway revealed that it had in excess of $50 billion in cash. That's the most it's ever had in more than 40-years.

So should you be holding cash too? The answer is yes.

Read on to uncover why you should hold cash as part of your investment strategy…

Why you should hold cash

Holding cash makes investment sense. It means you can put it to work at some time in the future.

Think about the stock market’s performance. It’s been a long time since there’s been a correction. It’s just a matter of time before there’s a market correction, Alexander Green in Investment U explains.

If you don’t have cash on hand, you can’t take advantage of bargain share prices. The only way you could take advantage is to sell some of your other holdings. And if there’s been a market correction, you’ll most likely end up selling these for less than you want.

The way Warren Buffett works

Warren Buffett, along with his business partner Charlie Munger, are value investors. This is an investment strategy pioneered by Benjamin Graham.

When the financial crisis hit five years ago, Warren Buffett said that investors should get out of cash.

Here’s a quote from a piece Warren Buffett wrote for the New York Times at the end of 2008…

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value… Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzy’s [a former Canadian ice hockey professional] advice: ‘I skate to where the puck is going to be, not to where it has been.

The fact that Warren Buffett is now holding so much in cash speaks volumes. It shows where he thinks the market is headed.

The investing great is waiting for a better buying opportunity.

So there you have it, why you should take a leaf from Warren Buffett’s book and have cash on hand.

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Why you should take a leaf from Warren Buffett's book and have cash on hand
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