There is a nice little debate happening in the halls of corporate America that reflects the debate going around kitchen tables across America today. Where do I put my cash?
In the case of the corporation, the Chief Financial Officer has choices, but it boils down to three basic ones. First, re-invest in the business. They run all kinds of analysis to see if a project is net present value positive based on realistic opportunity costs for other uses of the cash. If the project comes up positive, they do it. If not, move to other uses. Second, they could send the money back to shareholders in the form of a dividend. Unfortunately, IRS tax policy causes most companies to step back from doing that. So, they do a stock buyback and tell their shareholders its a return of capital. I don’t think so. Lastly, they can simply park the money into a bond portfolio and wait out the storm. The nice thing about this is it’s safe. However, the duration of the bond portfolio they buy might kill them and there is risk if by chance interest rates change quickly in the short term. Fortunately for CFO’s, the Fed has given them the wink that nothing is expected to change over the course of the next year.
There is one other place corporations ought to start thinking about that I will cover later in the post.
Contrast that with the kitchen table. At the kitchen table, you are your own CFO. The same as a corporation, once you pay your bills you need to figure out where to put any excess cash that you have. Just like a corporation, your decision will depend on how much cash you have. Less cash, you’ll be more conservative and simply sock it away in a savings account. That’s just like the CFO putting money in US Treasuries. If you have more cash, you can assume a little more risk. You will start to figure out a way to assume more risk and try and make that cash pile grow. If you want to pay a dividend to yourself, put some money in a retirement fund. Someday in the future you will get paid back, and the tax system rewards you for doing it. But if you want to grow the cash for today, you are left with the regular choices. Treasuries-which seem incredibly risky at these prices-although over the next year you probably won’t lose. You can park some money in the stock market. However, if you look at the last ten years, the returns haven’t been particularly sparkling. The short term future of the stock market doesn’t look good right now given the amount of headwinds in world financial markets either. Lastly, you can invest in a small company that you can grow, or watch grow. Unfortunately, those companies come with the most risk.
The last option seems like the most viable right now. If we read the news, which companies are the most exciting. Which are offering the best returns? It’s start ups. Facebook, Groupon($GRPN), Zynga, and Twitter were all created in the last 7 years. Google($GOOG) was created in 1999. Apple($AAPL) was remade around the same time. If you have the extra cash, the risk/reward is very good.
Some people think that putting money in a start up is like going to Vegas. But the reality is very different. Over the course of the past twenty years, we have learned a lot about innovation and entrepreneurship. There are some best practices. Not every business is going to succeed. There is a lot of randomness in why businesses don’t make it. But, when they hit, they hit big.
That’s why money is starting to flow to, and should flow to entrepreneurship. The Federal Reserve has devalued money. It has penalized savers, increasing the risk of holding dollars. Once you realize that, you need to move those dollars into potentially more profitable avenues.
For the corporate CFO, it means setting aside cash to invest in start up companies that compliment its existing business. Many companies have done this for a long time. Intel is one example. But, we are starting to see it in places you wouldn’t expect it. Nordstrom has an innovation lab. They are a ten billion dollar company looking to make seed stage investments. If an old line clothing retailer can find value in innovation, so can other companies and so can you.
What if you can’t find a business to invest in? What if you can’t find a fund that seems good enough for you to put money in? Invest in yourself. Start your own business. You’ll get more intrinsic value out of that than you will anything else. And the next time the stock market falls out of bed, you won’t bemoan the fact that you are losing money. Your money will be tied up in your business where you are adding and growing value.
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