VD 110: Cash is King

In this issue:

• Cash is king

• Stock in focus: Adyen

• The Rationality Test: Aliaxis, Etex en Sibelco

• What I’ve been reading these past few weeks

• News from our companies

• Doubler Portfolio update

Cash is king

What’s unfolded over the past week is frankly mind-boggling. We’ve seen a U.S. President manipulate the market so blatantly—talking up a storm of war on Friday, only to offer soothing words on Monday before the American markets even opened.

We’d be wise to ignore this short-term noise and keep our eyes on the long game. After all, the war brings long-term concerns and consequences. The most obvious, of course, is the disruption of shipping due to the semi-blockade of the Strait of Hormuz. I call it a semi-blockade because Iran is letting ships through, provided the oil is paid for in Chinese yuan.

This bottleneck, combined with the destruction of oil infrastructure, is going to keep oil prices higher for longer. To be fair, we were already expecting higher prices. I actually wrote about this in Smart Capital 507, which came out the day before the war started. That forecast wasn’t based on conflict, but rather on years of underinvestment in the sector. Now, the war and the resulting damage are being layered on top of that.

The issue of higher oil prices is becoming much more pressing. Expensive oil leads to rising prices and higher inflation, which usually triggers higher interest rates. In short: everything gets more expensive, making people more cautious with their spending. That, in turn, can lead to an economic slowdown or even a recession.

It’s also striking how AI has almost completely vanished from the headlines, even though that steamroller is still’ thundering along. We’re seeing overinvestment on one side and job losses on the other.

Then there’s Private Credit, which is struggling to meet the demands of clients who want their money back. It makes sense—liquidity was created on the back of illiquid investments, and that math just doesn’t add up. Private credit and private equity are illiquid by nature. You’re either in for the whole ride, or you shouldn’t get on at all.

You’d think all these worries would cause the markets to take a serious hit. Yet, the S&P 500 is only down 3.7% since the start of the year and is still up 14% compared to twelve months ago. That definitely raises some questions for me.

Feeling Nervous The observations above make me nervous. Not because my stocks might drop or because my companies won’t survive the storm, but precisely because the market isn’t falling (enough).

While the market stays stable, the risk of significant inflation is skyrocketing. What should I do with my cash? If stocks don’t drop enough and I don’t buy, inflation will eat away at my cash position. My first instinct was to start buying anyway. If not individual stocks, then why not add to positions in Exor or Sofina, which are currently cheap?

On the other hand, Exor’s John Elkann says the following:

“As of now, we believe that cash is king, and it is a moment where making sure that we do have a fortress balance sheet is important. And that is also the case for our companies. We believe that our companies are all with very strong balance sheets, which is the most important thing when you do enter in uncertain times, as we have learned in the past.”

The point about companies with solid balance sheets applies to us as well. Even our deep value plays are robust enough to weather a storm; often, they’ve already been sitting in the middle of one for a while. Every other company in the portfolio also has a solid balance sheet—otherwise, we simply wouldn’t invest in them.

Still, I find myself second-guessing the cash balance. Fortunately, inflation isn’t moving quite that fast yet, giving us some time so we don’t have to rush into anything. But I’ll admit, it’s hard not to jump at the sometimes sharp drops in individual stocks. Sleeping on it is always a good idea.