Only the Paranoid Survive
After I wrote about Harvard and the fact that liquidity is hard (or at least that people go out of their way to make it harder than it needs to be), I got a text from my old friend Morgan Housel who said that he loved the Permanent Equity policy of keeping 18 months worth of operating expenses in cash on our balance sheet. Because that stood in stark contrast to the financial condition of many other businesses. For example, he remembered that at the start of the March 2020 lockdowns the average American restaurant only had enough cash to last 14 days. While some of that can be attributed to business model, another element is mindset.
“Only the paranoid survive,” he advised. Or in his case the paranoid become globally famous best-selling authors (new book out October 7!) who people will pay to just come speak to them. What a world.
Not long after, Alan emailed me to ask a clarifying question: “I’m curious. Does cash mean cash or does it include cash equivalents like treasuries?”
“Cash and only cash,” I wrote back. “Because there is no medium risk.” That, of course, probably made Alan think that I’m paranoid, which I am, which is why Morgan and I get along, though I try to also be optimistic.
After all, there is no better medium than cash and only cash for ensuring that you have 18 months worth of operating expenses on your balance sheet. That’s important because there are two elements to PE’s policy and both matter: magnitude and medium. In other words, it doesn’t matter what you keep your savings in if you don’t have enough, but once you have enough, you need to make sure you keep your savings in something that won’t suddenly become not enough.
As for whether or not that somewhere or something includes cash “equivalents,” well, I’ll stick with cash and only cash since Morgan tells me only the paranoid survive.
See you Friday.
– Tim
