On the last episode of the After Dinner Investing podcast, I talked about the new After Dinner Investor portfolio and how 25% of the fund is currently in cash. And I talked about how I always like having some cash in the portfolio to use as dry powder to take advantage of the times when stocks crash, like in 2008.
But I wasn’t sure how much cash I should keep. Is keeping 10% enough to take advantage of a drop? Is keeping 20% or 25% way too much and going to weigh down the fund’s performance? It’s a tricky question.
Well lucky, for us, Mohnish Pabrai recently shared his thoughts about cash. Near the end of the question and answer session, after his October 2018 Morningstar India Conference talk, the host asked him about cash. The video below starts with that question. Let’s see what Mohnish said.
Here’s a summary of what Mohnish said:
- Mohnish said, at this time, out of the $800 million he manages, approximately 10% is in cash.
- He says the last 10% of the fund (the last 10% of the cash) becomes what he calls “very expensive capital.”
- He says he doesn’t want to invest that last 10% to get just a double.
- He wants to get something north of 40% a year on the last 10% of capital, which is “kind of like a 5 to 6x in the next five years.”
- And “when we find that, we put that to work.”
So it sounds like Mohnish likes keeping around 10% of the portfolio in cash, in hopes of finding a 5 to 6 bagger, a real tremendous opportunity. And it sounds like when he does find that opportunity, he invests the last 10% and is okay being fully invested and not holding cash, if I’m reading into what he’s saying correctly.
This is great advice. I think for now, I’m going to sit with cash around 10% to 20% of the portfolio and do the same thing Mohnish does. Be extremely unreasonable with the last 10% and demand a tremendous “north of 40% a year” return opportunity in order to part with the last 10%.
As Charlie Munger says:
There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when I wasn’t awash in cash — and I don’t want to go back.
It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.