Cash, what a beautiful word. It’s music to our ears. Everyone loves cash. Without any doubts, cash is a powerful instrument that gives us freedom in various aspects of our life. Having cash on hand provides the investor with an opportunity to buy an interesting asset, at any time, they see the chance to strike a bargain.
In this context, cash means monies put into Treasury bills and other highly liquid instruments. Note that a call option provides a buyer with the right to obtain an asset at a specified strike price on the expiration date. The positives of call options are that they can bring the buyer unlimited upside at the same time limiting the maximum loss.
Cash as a Call according to Warren Buffett
Warren Buffett represents cash as a perpetual call option. His biographer Alice Schroeder says that Warren looks at cash as a call option without the expiration date. In general, he has a reputation of a patient long-term investor, who knows how to wait for a really good opportunity to stop by.
Over his career, his best opportunities occurred during periods of crisis and uncertainty. While others were afraid to invest, Warren bought companies in a number of sectors.
What about an average investor?
Thinking of cash as a perpetual call option, an investor should take into account at least 2 things: a significant amount of cash and a perfect sense of market timing. This scenario can bring a good amount of wealth indeed, however, such investors are more likely an exception rather than a regular occurrence.