Bridgewater founder Ray Dalio and Berkshire Hathaway founder Warren Buffett are two of the brightest, most well-respected minds in business. But they have starkly opposing views when it comes to holding cash vs. investing it.
“Cash is trash. Get out of cash. There’s still a lot of money in cash,” Dalio said last week from the World Economic Forum in Davos, Switzerland. “The depreciation of the exchange rate and the printing of money over the next few years is going to be the biggest thing.”
Meanwhile, Buffett is sitting on a massive stockpile of cash, about $124 billion to be exact, according to Berkshire’s third-quarter 2019 filing.
So which Wall Street sage is correct and which is wrong?
Well, the answer, of course, is complicated and it depends almost entirely on what your goals and means are as an investor.
If you hold onto cash for too long, it will ultimately lose its value because of inflation, which the Federal Reserve targets at 2%. Inflation in the U.S. will continue to erode your buying power so the notion that holding on to it is free of risk is incorrect — particularly if inflation suddenly takes off again like it has at times in the past.
Dalio is correct in noting that investing that cash in stocks should grow your money much faster than say putting it into a savings account with a low interest rate, particularly during the bull market of the last 10-plus years.
However, Buffett sitting on a colossal pile of cash is in part strategic — he’s waiting for exactly the right time to swoop in and make a big purchase when the price is right.
So in effect, both are correct and it all comes down to the retail investor Dalio vs. a value investor like Buffett.
According to GuruFocus, when Dalio literally says “cash is trash,” he’s speaking more to retail investors and evidence suggests cash doesn’t provide positive real returns over a long period of time. He says investors should properly diversify their portfolio to lead to good returns no matter the macroeconomic and geopolitical conditions going on around the world.
However, Buffett is not a retail investor so his tactics are very different from the common everyday investor — like 99.9% of people reading this story.
Berkshire Hathaway is a major purchaser, often looking to buy up 10% to 30% of companies Buffett and his team find attractive and valuable.
This makes it practically impossible for the company to make investments in small-cap stocks without creating a significant impact on the market price. Therefore, even if attractive opportunities are available in small companies, Buffett might be forced to hold on to cash.
In his 2018 annual letter to shareholders, Buffett wrote, “Prices are sky-high for businesses possessing decent long-term prospects.”
So ultimately, it’s important to take note that Dalio’s advice is geared more for average retail investors while Buffett’s sitting on a massive cash pile makes sense because he’s waiting to make multi-billion-dollar investments when the time is right.
So if you’re reading this, chances are you’re going to be better off following Dalio’s advice and investing your cash — but certainly not all of it!
While there will always be ups and downs with the market, if you invest wisely and diversify (and hold on to some cash in savings), you’re likely going to be far better off in the long run.