Even Bruce Springsteen, long after raking in the millions from Born To Run, Darkness on the Edge of Town, The River, and Born in the U.S.A., still needed to borrow money short-term to make ends meet:
Considering the money he’ll earn from his two new albums, it’s hard to believe Bruce Springsteen once needed a $500,000 loan from the Orioles’ Rick Sutcliffe for a down payment on a southern California home.
Actually, “needed” probably isn’t the right word. Springsteen had plenty of money back in 1986; he repaid Sutcliffe two days later. But as so often happens with rock stars, baseball players and other rich people, he just wasn’t liquid.
The Boss was waiting on a CD — a certificate-of-deposit, that is, not a compact disc. It was scheduled to mature two days after the paperwork for his closing was completed, and smart businessman that he is, he didn’t want to forfeit the interest.
Sutcliffe entered the picture through the seller — his good friend, actor Mark Harmon. It just so happened Sutcliffe had set aside $500,000 to purchase an annuity that same week. His agent, Barry Axelrod, suggested the loan. He, too, was close with Harmon, from their days together at UCLA.
Springsteen was so grateful, he chipped in with Harmon to buy a gold Baretta shotgun for Sutcliffe, an avid hunter. “Then when he came to Chicago, I went backstage with him,” recalls Sutcliffe, who was then with the Cubs. “They sent a limo to get us. It was pretty amazing.”
Obviously, he’s the Boss, and the money borrowed was not something that was necessary for his survival. It wasn’t exactly a “the landlord is about to evict my wife and kids to the street” kind of moment. It’s all about short-term liquidity.
If you study the truly great value investors of the past fifty years, there is one thing that is common to all of them: they always had ample cash on hand. Buffett is sitting on over $35 billion. Seth Klarman puts anywhere from 25-40% of the Baupost Group’s funds in cash, depending on the market conditions. Charlie Munger has once remarked: “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. 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.”
When you look at the big corporate collapses of the past six or seven years, it all had to deal with a lack of liquidity. Lehman Brothers. Bear Stearns. Wachovia. Legendary firms with 100+ year records, brought down because they did not have enough cash on hand to meet their obligations. Heck, Goldman Sachs and General Electric had to borrow money from Buffett because they were having liquidity problems.
Having cash on hand is a normative quality among the value investor guys. It’s taken for granted. As Buffett said when reflecting on the financial crisis, “Some day in the next 100 years when the world stops again, we will be ready. There will be some incident, it could be tomorrow. At that time, you need cash. Cash at that time is like oxygen.” Part of the wisdom for keeping cash is dealing with unexpected bills that could force you to sell stocks—a cash cushion lets you stay in the game. The other reason has more to do with offense. Once or twice every generation, valuations show up that are great deals. The years 2008 and 2009 was the most recent example: Coca-Cola at $20 per share, Aflac at $10 per share, Emerson Electric at $25 per share, General Electric at $6 per share, Wells Fargo at under $10 per share, and so on. When those opportunities arrive, you may want to have more cash on hand than you would have readily available from your paycheck. Liquidity is all about overcoming emergencies and acting opportunistically when unique, once-in-an-era bargains present themselves.