How To Get Income For Life

Warren Buffett recently said that his Berkshire Hathaway conglomerate was sitting on $100 billion in cash.

The word “awesome” is much overused. People like to say that about the most mundane things we encounter. But Buffett’s cash pile is truly awesome.

Without putting too fine a point on things, the pile of readies is equivalent to around a third of Singapore’s annual economic output. It is more than the Gross Domestic Product (GDP) of Myanmar, Laos and Cambodia combined, for an entire year.

And unless Buffett can find a way to spend the money, the pile could grow even larger.

A nice problem

But Buffett doesn’t exactly want to sit on the cash. He would much rather put it to good use. However, he can’t find anything suitable to buy, just yet.

In his case, there is probably nothing out there big enough for him to buy. With the cash, he could acquire Singapore’s three listed banks, DBS Group (SGX: D05), UOB (SGX: U11) and OCBC (SGX: O39), and still have money left over to buy a couple of property companies.

But if and when Buffett finds something worth buying, he is likely to move big and move quickly.

That’s because one of the key features of Berkshire Hathaway’s strategy is to continually grow its portfolio of long-term investments.

In other words, Buffett has regularly added to his portfolio, when the opportunities have arisen. As he grows the size of his assets, so too has the income produced by those investments.

Cash is King

But investing is not without risk…..

…..Buffett once said: “Writing a cheque separates conviction from conversation”. So the act of making a conscious investment should always be taken seriously.

In essence, it means that we are moving from a safe asset, such as cash, to something less predictable, such as shares.

Many of us like to think that cash is safe, while shares are risky. That is the way our brains work….

…. Cash, which we can see and feel and put under our mattresses, is perceived to be safe. Shares, which can go up and down like a yo-yo, are risky.

However, Buffett thinks of cash differently.

He once said that holding onto cash, which pays just 1% interest, was tantamount to buying a stock with a valuation of 100 times earnings.

Not many of us, I suspect, would ever consider paying $100 for a stock that generates just $1 in profit. But that is precisely what we are doing when we sit on cash.

Cash is risky

There is something else to consider. Many of us tend to think of risk as being a loss of capital. Put another way, we are concerned that an investment in the stock market could be worth less tomorrow than today.

That is possible. The market can be unpredictable in the short term. So, there is a chance that our shares could fall in value after we have bought them.

But what if I told you that cash in the bank is losing its value all the time.

At 2% inflation, $100 today would only have the buying power of $98 after one year. In 36 years’ time, it will only have half its buying power compared to today…..

….And that is provided the rate of inflation stays at 2%. Chances are, inflation could pick up sooner than we think.

When we think of cash in those terms, it begins to look a lot less attractive.

Why shares                 

For me, shares are the best place for our money, if we are prepared to invest for the long term. Over that period, the value of our investments can both rise as well as fall.

But ultimately it is neither the stock market nor even the companies that determine an our fate. It is, us, the investor.

We need to remember that time is on our side when we invest in wonderful companies. The key to making money is to not get scared out of them, regardless of what might happen to their shares.

In fact, if the opportunity presents itself, we should seriously consider buying more.

But that only applies if we have identified truly wonderful companies….

….At Stock Advisor, we only invest in wonderful companies. If you would like to find out how we identify those wonderful companies, just click here.

A version of this article first appeared in Take Stock Singapore. Click here now for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David KuoTake Stock - Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.The Motley Fool Singapore has recommended shares of United Overseas Bank Ltd and DBS Group.  Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.