Jason Zweig writes the Intelligent Investor column for the Wall Street Journal. His recent contribution oddly echoed a query I received the prior Thursday during a speaking engagement in New York. Referencing the ‘Loss of Nerve’ principle in “When Growth Stalls”, my questioner wanted to know if it was prudent to conserve all the cash he could during the economic downturn. My answer to him was “not necessarily,” a thought reinforced by Zweig’s column.
“While many financial companies are thirsting for cash,” Zweig says, “there’s an even bigger group of businesses drowning in the stuff – to the detriment of their shareholders.” Citing Goldman Sachs research that found non-financial S&P 500 companies have over $800 billion in cash and liquid securities on hand, Zweig said, “Squirreling away cash is almost as bad a frittering it away. The returns on idle cash are lousy, and putting cash to productive use is one of management’s central obligations to shareholders.”
He’s right. Zweig says research from the University of British Columbia shows that stocks with the biggest cash hoards have actually underperformed those with the least amount of extra cash. That is consistent with the behavior my research revealed at stalled companies – a fear-driven pullback on the reins of innovation and marketing. It’s a malady that keeps many companies stuck in their funk, some of which never recover.
While hunkering down is a natural response to a tectonic event, there comes a time after the shaking stops to get up and get on with life. Whatever shape your house may be in, it won’t repair itself. Somebody has to reinforce the walls and re-shingle the roof, both of which require resources.
“Many big companies are being too cautious with their cash by any measure of prudence,” Zweig says. Are you?
Steve McKee is a BusinessWeek.com columnist, marketing consultant, and author of “When Growth Stalls: How it Happens, Why You’re Stuck, and What To Do About It.” Learn more about him at www.WhenGrowthStalls.com and at http://twitter.com/whengrowthstall.