How to Be the 'Last Man Standing'
The other side of crisis... How to be the 'last man standing'... What is 'cash' – and how much should you have?... The upside and downside of cash today... Introducing Stansberry's Financial Survival Program...
Warren Buffett was in Alaska on a sight-seeing trip...
And the charter-boat captain announced he was going to pilot closer to the sea lions resting on the river's chilly edge. Buffett said, "No, no!," fearing the satellite-phone connection he was using would stop working if the boat got too close to the towering canyon walls.
This was September 1998, and there was blood in the water... not in Alaska, but back in New York. A major financial crisis was brewing that, for him, marked a potential money-making opportunity... His mind was on that, rather than Alaska's natural wonders.
"We were sailing up through these canyons," Buffett recalled, "which held no interest for me whatsoever."
Buffett's view from the boat marks the "other side" of the crisis that I (Corey McLaughlin) wrote about earlier this week... That is the failure of Long-Term Capital Management ("LTCM"), one of the bold-faced and telling financial blunders of recent decades.
As we described in Tuesday's Digest, through a series of massively overleveraged bets, a group of some of the supposed smartest people on Wall Street in the late 1990s ended up on the hook for nearly $4 billion. Money that they didn't have...
The losses deepened, as shown on the hedge fund's balance sheet, and in the net worth of the men who started it ‒ many who had put up large amounts of their own money. As things progressed, Buffett got more than one phone call about what was happening...
And he was asked if he was interested in buying the financial assets the firm had remaining.
It's a relatively famous story in financial circles today...
Fortune magazine wrote up what happened shortly after the events, and Buffett described the details in a talk to students at the University of Florida just a few weeks later in October 1998...
For much of that fall, former colleagues of his at the Wall Street firm Salomon Brothers had been telling Buffett that LTCM was in bad shape, stemming from exposure to Russia's recent debt default... and the Asian financial crisis of 1997 before that.
Right before Buffett was leaving home for a 12-day vacation to Alaska and other sights, like Yellowstone National Park that September, the trouble for LTCM got serious – to the point where the firm welcomed being saved from an outside source...
The timing of LTCM's failure and the tender technology of the moment (satellite phones!) meant that Buffett didn't have seamless communication with Wall Street. If he did, things might have gone differently... but as it was, he made an outline of an offer by phone.
As he recalled in his talk at the University of Florida...
In the end, it was a bid for $250 million for, essentially, the net assets but we would have put in $3.75 billion on top of that. It would have been $3 billion from Berkshire Hathaway, $700 million from AIG, and $300 million from Goldman Sachs.
In a power position himself – since he had plenty of cash and they didn't – Buffett gave LTCM no more than an hour to accept or decline the deal. He didn't want prices moving around too much... Plus, he was on vacation.
They said they couldn't accept his offer.
Ultimately, that same day, the Federal Reserve bailed out LTCM with its own $3.6 billion deal that it orchestrated with many of Wall Street's biggest investment banks.
Eventually, those banks made some money back... And a few years later, in 2000, LTCM liquidated its assets in a more orderly fashion. In the meantime, Buffett kept on rolling, none the worse for the experience other than to say, "It was an interesting period."
Yes, it was. And as I will explain in today's Digest, it's an experience anyone interested in building serious wealth can learn from.
Here's the first and biggest point...
Why was Buffett in a position to buy Long-Term Capital Management?
He had cash... And lots of it. Easily available.
Yes, thanks to how he lives, and how he and business partner Charlie Munger structured Berkshire Hathaway (BRK-B) when they created it, they are never beholden to debt... while much of the rest of the world is, whether they know it or not.
When it comes to Berkshire's holdings, which includes a handful of insurance businesses among other things, Buffett and Munger have pledged to always have more than $30 billion or more of cash on the books.
As Buffett wrote in his annual letter to Berkshire shareholders this year...
We want your company to be financially impregnable and never dependent on the kindness of strangers (or even that of friends). Both of us like to sleep soundly, and we want our creditors, insurance claimants, and you to do so as well.
In other words, they don't want to be reliant on someone lending them money. That's "the kindness of strangers." And by taking this approach, they can actually make more money and take advantage of great buying opportunities... like the LTCM deal.
I recently finished a terrific book, Richer, Wiser, Happier: How the World's Greatest Investors Win in Markets and Life by William Green, that came out last year. I bring it up now because as you might imagine, Buffett is featured throughout.
And this quote about him from professional investor Guy Spier, who runs a hedge fund that has owned Berkshire Hathaway shares for more than 20 years and once paid $650,000 to have lunch with Buffett, stuck with me. Spier said...
Buffett has systemically set himself up to be the "last man standing."
Think about how valuable being the 'last one standing' could be...
In a world gone mad... full of greed, fear, and anxiety... and uncertainties about war, inflation, and any number of other things, how great would it be to be the "last man standing"... even if in just your own circle of family, friends, or community?
What if you're the last one standing in a liquidity crisis... or have cash on hand to take advantage of the next 30% drop in the markets. In a crisis, Wall Street often sells everything and asks questions later...
And it's sometimes good to be the one buying, like at the March 2020 bottom of the COVID-19 crash.
As individual investors, if we're not beholden to debt payments and liability calls (which we shouldn't), you can stick to your plan (like stop-losses or profit targets) and sell and, with cash, you can then buy like Buffett to make gains for the future.
The good news is that, while none of us here are the world's fifth-wealthiest person, you – and anyone else – can definitely apply Buffett's approach to your own finances or business... Today, I am here to encourage you, or remind you, to do just that...
It's easy to get caught up in tracking market trends, trying to predict what's going to come next, or analyzing great opportunities in stocks or other assets. Those are the commonly obsessed-over parts of the financial research and money-management industries...
Meanwhile, a fundamental idea like "having cash" and what it can do for you, your portfolio, and your life over the long term, even in inflationary times – is often ignored, overlooked, or not even made easily available to many people... Not here.
Given the market volatility we've seen this year – just like in the fall of 1998, as Buffett referenced – and warning signals we're seeing about potentially more trouble ahead, this timeless advice, via the Oracle of Omaha's blueprint, is timely yet again...
In fact, "raising cash" is a big part of the first lesson of our new Stansberry's Financial Survival Program, which I'm happy to report is available now to purchase and for our Stansberry Alliance members to access immediately.
I urge you to check it out... In short, this is a newly created seven-week course designed specifically for the uncertain and volatile markets we're in today. Our team has spent the last few weeks putting the lessons together, and we're excited to share them with you.
But before I get into more details about that, it's important to clear up what might be a common question about our topic today of "cash." It's a question I had when I first got started in this industry...
What the heck do we mean by 'cash'?
Are we talking about stacks of greenbacks in a safe? For this answer, we turn to our colleague and Stansberry Research partner Dr. David "Doc" Eifrig, editor of our Retirement Millionaire and Income Intelligence newsletters...
Doc has written frequently on this topic, like in the August 12, 2021 edition of his free Health & Wealth Bulletin. He wrote then...
By cash, we don't mean actual dollar bills stacked up in your sock drawer. We mean money you can access quickly, with no loss of capital and few transaction fees.
This includes checking accounts, savings accounts, and a few short-term investment accounts, like money-market mutual funds.
Basically, cash is the money you can use to pay for things with no worry or hassle.
From there, when we talk about how "cash" fits in your financial picture, we're really talking about two different things...
- Your emergency fund
- The cash allocation of your portfolio
We're not personal financial advisers, but before you start looking to invest in anything, you should have an emergency cash fund. This is money set aside for unforeseen emergencies, especially the loss of your income.
As Doc wrote, the dollar amount of a comfortable emergency fund is different for everyone and depends on how nervous a person you are, what your budget is, and what responsibilities you have, as, say, a parent or business owner...
It depends on how safe you want to be. You can find experts saying that you should have between three and 36 months of living expenses in your emergency fund. I'd narrow that range to between six and 12 months.
If you're on the younger end of life or are just new to taking your finances seriously, it's probably more useful to go back and figure out how Buffett got in a position to have so much cash...
The truth is, he started early... as a 10 year old. And he started small, by buying three shares of Cities Services stock for $114.75, which was all his savings. By age 30, he had a net worth of $1 million, or about $10 million today adjusted for inflation.
His father was an investment broker, so he had a head start. Not everyone is so fortunate...
But the lesson here is you must start somewhere. By earning and saving, then investing wisely and building a stockpile of cash.
Once you have an emergency cash cushion – even a small cushion, something is better than nothing – you can think more seriously about the long-term cash allocation in an investment portfolio.
This is the money that you can put to work like Buffett does when opportunity knocks... or calls you while on vacation in Alaska. Real estate after the housing bubble burst in 2008 is a good example. Those with cash on hand could take advantage during a bad time.
This is what Buffett calls "optionality." Cash gives you choices... which has value itself during times of market crisis...
Once you have these concepts squared away, usually the next question is...
How much 'cash' should I have?
Again, this answer is going to be different for everyone...
If you're Buffett or Berkshire Hathaway, as of February 26 – when he released his annual shareholder letter – cash meant $144 billion, mostly in U.S. Treasurys, all maturing in less than a year.
This is a massive "cash" pile. As Buffett wrote, a $120 billion stake in Treasurys left Berkshire financing half of 1% of all the publicly held U.S. debt...
Wow!
No wonder Buffett refers to the U.S. government as a "silent partner."
For most of us mere mortals, our cash reserves will be much less in nominal terms, but they might be similar in percentage terms. Berkshire has about $1 trillion in assets, so it's cash position earlier this year was around 15%.
As Doc wrote in his Health & Wealth Bulletin piece...
For a young person with 30 years to retirement, there is little reason to have any cash holdings in your portfolio after you set aside your emergency fund.
As you get closer to retirement, you should start moving some of your investments over to cash. You should start this phase five or 10 years before retirement. And you could gradually grow your cash allocation from, say, 5% to as high as 20%, depending on your goals.
If you're closer to retirement, you might want more of your portfolio in cash, because if you're loaded up on stocks and bonds just ahead of a bear market, and you have to sell assets to generate cash for day-to-day expenses, you end up selling at just the wrong time.
Like those supposed geniuses at Long-Term Capital Management who ended up almost selling to Buffett. In Green's book, he writes...
Following Buffett's lead, we should always keep enough cash in reserve so we'll never be forced to sell stocks or any other beleaguered asset) in a downturn.
All that said, cash does have a big downside...
The biggest is inflation, which destroys the value of cash and your purchasing power.
We don't know for sure, but this might be one reason why Buffett has been on a buying bender as of late...
Berkshire has put some of its cash to work, spending $22 billion over the last month alone, in the outright purchase of insurance company Alleghany (Y) and buying big stakes in oil and gas company Occidental Petroleum (OXY) and printer-maker HP (HPQ).
It's not hard to imagine that Buffett would rather have the cash rolling in from these appreciating profit-makers (stemming from higher energy prices and interest rates) rather than relying on the relatively paltry yields on bonds that aren't keeping pace with inflation...
As we've written a few times this year, this is why the conventional "60/40" stock-bond portfolio has been performing so poorly this year. Passive strategies like it may work in bull markets in stocks and bonds... but can hurt everyday investors in more volatile times.
This brings us to more detail about our new Financial Survival Program...
As I mentioned, this is a seven-week course – created for this moment. The program is a new product, designed by our world-class analysts to be a detailed, top-to-bottom – yet easy to follow – plan for today's market environment.
We've touched on many of the topics in the Digest over the last few months when talking about the possibility of a bear market or recession... and now our team has gone deeper and put together actionable advice for what is a very reasonable price.
As our publisher Brett Aitken wrote in announcing this program to Alliance members today...
Stansberry's Financial Survival Program is made up of seven (7) potentially life-changing modules showing you how to protect yourself in times of financial crisis – both now and in the future.
Each one of which could protect your savings and give you relative safety and stability amid the whiplash of war... inflation... and the rumblings of a devastating bear market ahead...
While also potentially delivering hundreds of percent upside – not just in spite of, but because of the turmoil today.
I'm not giving too much away – and hopefully not scaring you away from being interested – by saying lesson one of the Financial Survival Program talks about the importance of cash. In the module, Doc writes...
During a bear market, nothing is more important than cash. And it's not hard to understand the basics of why... In fact, you could define a bear market as the rising value of the U.S. dollar versus financial assets.
Likewise, when commodities... or real estate... or foreign currencies... go through a bear market, what you're really seeing is the rising value of the U.S. dollar compared with those other assets.
From there, Doc goes into much more detail...
He shares even more wisdom from Buffett... stories, data, and advice that can help you survive a market downturn... the history of bear markets... and then Doc gets into the nitty-gritty of what he calls the "safest form of cash available today."
Given how high inflation is running, the best way to hold cash today isn't as straightforward as it was even a year or six months ago.
In the first lesson of our Financial Survival Program, Doc gives you four specific recommendations for how you can allocate to "cash" to make the most of your money... shares all the reasons why you should... and provides the simple instructions you need to do it.
It's a great start to this new offering from us and we're happy to be able to share it with you. Click here for more details on Stansberry's Financial Survival Program... and get going on becoming the "last man standing."
And Alliance Members, you already have access to this new program, free of charge. Please check your e-mail or the new StansberryResearch.com to find it. And stay tuned for more. After today's installment, we'll continue to deliver one new lesson each week for the next six weeks.
The Next Bitcoin Play
Venture capitalist and Shark Tank panelist Kevin O'Leary tells our editor-at-large Daniela Cambone about what's happening at Bitcoin 2022 in Miami this week...
While he welcomed the White House's executive order on cryptocurrencies issued last month, O'Leary helped interpret the good and the bad of the many crypto regulations being discussed in Washington.
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
New 52-week highs (as of 4/7/22): AbbVie (ABBV), AutoZone (AZO), Bristol-Myers Squibb (BMY), Brown & Brown (BRO), Black Stone Minerals (BSM), Cameco (CCJ), Centene (CNC), Costco Wholesale (COST), Dollar General (DG), Enterprise Products Partners (EPD), Franco-Nevada (FNV), Hershey (HSY), Coca-Cola (KO), Mosaic (MOS), Novo Nordisk (NVO), Sprouts Farmers Market (SFM), Sprott Physical Uranium Trust (U-UN.TO), Walmart (WMT), Consumer Staples Select Sector SPDR Fund (XLP), and Zeta Global (ZETA).
In today's mailbag, feedback on Dan Ferris' Thursday Digest and a recent episode of the Stansberry Investor Hour podcast... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Dan, I love your work. I'm not one to use the word love frequently but when you get negative, I think you are doing your clients a great service! At least they see that some excellent investor has a lot of serious questions about this bubble and the supposed 'investments' in stocks.
"I also loved the discussion with Kim Iskyan [on the Stansberry Investor Hour]. I liked the way he was hesitant about having a crystal-clear understanding of Russia. I don't think anything is crystal clear right now, but you guys hit on great points." – Paid-up subscriber Al M.
All the best,
Corey McLaughlin
Baltimore, Maryland
April 8, 2022