Market Indicators: The Best-Kept Secret to More Effective Trading and Investing

Chapter 4. Follow the Money: Cash, Debt, and Shorts

	There's nothing wrong with cash. It gives you time to think.
	--—ROBERT PRECHTER JR

Real estate and artwork and other collectibles may appreciate, but it can be tough to get your money out of them. For that, you need one or more of the three types of liquid investments: stocks, bonds, and cash. Market strategists (more on them in Chapter 9) focus on these three basic categories, varying their allocation slightly between stocks and bonds based on their market outlook. Cash—such as that kept in money market accounts—is usually an afterthought.

Some investors think that "cash is trash." It yields less than a bond and lacks the growth possibilities enjoyed by a stock. And it's true: nobody ever got richer by sitting on cash.

Of course, nobody ever went broke sitting on cash, either. Bonds occasionally default. Stocks can go to zero. When times get tough, cash looks great.

Seth Klarman, founder and manager of the successful Baupost Group and author of Margin of Safety, writes that he sometimes holds a great deal of cash in clients' accounts. He explains that owning stocks he doesn't really like removes his ability to take advantage of future bargains. "Maintaining moderate cash balances or owning securities that periodically throw off appreciable cash is likely to reduce the number of foregone opportunities," he writes.

Klarman is an exception. Most investors raise cash after stocks have significantly declined. The cash cycle looks like ...