Hail Cash, for Cash is King!

In Fortress Balance Sheets, I talked about how my Aston Martin adventure has taught me that leverage is "the most dangerous gift in finance". In this unusual crisis, however, I am learning not only about the perils of leverage, but also the importance of cash. 

I now realise that it is valuable to have what may, in the normal course, be considered an obscene amount of excess cash. Several companies (e.g. Booking Holdings, which owns OTA Booking.com) are likely to see their revenues hit zero (note that this did not happen even in GFC). Such firms will still incur fixed costs as well as those variable costs, which cannot be cut quickly. So, firms will lose a lot of money. A strong net-cash balance sheet position allows a firm to comfortably weather this storm, without being forced to permanently dilute equity holders. And, perhaps most importantly, having an abundance of cash heading into a downturn can allow a firm to invest aggressively for the long-term at a time when a lot of other firms are fighting for survival. This is why, Facebook's USD 50 billion cash pile no longer seems excessive when you consider that the firm could potentially lose 25 billion this year alone.

Cash piles that seemed ridiculous only three months ago now seem anything but; so-called "excess" cash is now evidence of management's prudence.