Optionality Is King

Sorry Cash, but being Financially Flexible is the True Ruler

“Cash is king”.

You may have heard this before. Having cash allows you to make smart decisions and be patient. If you are leveraged to the neck and always fully invested, you can’t jump on opportunities when they come (at best) and may be looking at Rekt City if things don’t go your way (at worst).

The Covid crash is a recent example of this. If you were fully invested you lost ~1/3 of your money. If you had leverage, you lost even more.

If you had cash on the sidelines you got to buy stocks for 1/3 off.

And we all know the SP500 has been on a tear since then. Even if you purchased around $3,300 level before Covid you are up 69%. But if you purchased at the lows of ~$2,200 you are up 150%, over 2 times as much.

But it isn’t just stocks where having cash to buy cheap deals is huge. Cash lets you handle unforeseen expenses without having to liquidate securities. Cash lets you purchase real assets that come your way.

There is a reason that ‘cash is king’ is a common saying.

But, what if Cash is just a figurehead. The guy in front getting all the credit and even the hate from the ‘just keep buying’ crowd. What if there is a real ruler in this finance game and they are just chilling in the background?

I posit that ‘cash’ is really just a convenient and tangible item to point at, but all the benefits from ‘cash’ are really due to optionality.

Cash grants you optionality, but you can find optionality in a lot of places in addition to cash.

Optionality is the ability to have flexibility and multiple options. You get to sit back and wait; watch how things play out, and then strike when you want.

This is an optionality-maximizer account.

There is huge value in having flexibility and the ability to make your decision in the future when you have more information.

There are numerous other terms that have become popular for offering similar benefits:

Anti-Fragile: A system that thrives in volatility and chaos. The opposite of a fragile system

Mini-Max: A system that minimizes the probability of maximum regret.

Only having a single option makes you fragile. If life goes in a direction that is bad for that option, you lose. No optionality makes you fragile. Similarly, you can’t minimize the chance of a bad outcome with only a single option.

The rest of this post will elaborate on optionality and give numerous examples of ways to keep your options open so you don’t back yourself into a corner.

Having options can be the difference between having a crises and being able to take advantage of a crises.