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“Cash is King” and “Survivor is King”

Every time there is a crisis in the markets, the phrase "cash is king" and “survivor is king” is revived by people worldwide. It is understood that cash and survival are the key ingredients to making the most of a downturn, but is it true? At the first glance, the reasoning is sound, but we find that it is not necessarily what we imagined if we analyze further into the logic.



As of “cash is king,” there is no disagreement that cash can be king (or sometimes even trash, according to Ray Dalio), but in reality, cash is just cash. Why does cash become king during a crisis? There are two layers of logic.


First, when a crisis occurs, business slows, and deals fall through. Managers are faced with reduced cash flow and consistent expenses. Operating costs eat away profits, and a company's cash reserves become particularly important. In this situation, a lack of reserves can determine the solvency of an enterprise. This logic is often the basic understanding used by lenders in a financial crisis, “cash is king."


In fact, “cash is king," as borrowers referred to, is more accurately described as “cash is grain." Before the crisis, when the business was normal, and cash flow was greater than expenses, making money is easier and grain supply would not be a problem. However, when a crisis occurred, and the cash flow was less than expenses, only then did the cash flow becomes more valuable.


The most classic example is the story of "Pearl Jade and White Jade Soup" which originated from Zhu Yuanzhang (“Zhu”), the founder of the Ming Dynasty (1368–1644). Zhu almost starved to death during a severe drought that killed most of his family but there was a kind woman who happened to pass by him. She rescued him and put together the only piece of tofu at home, a handful of spinach, red roots, and green leaves, and poured a bowl of leftover rice to cook for him. Although the soup was no different from a delicacy, when Zhu ascended to the throne as the first Ming Dynasty emperor in 1398, he continued to eat this soup despite his immense wealth. This folklore vividly portrays how markets should react following a crisis.


Secondly, since cash is grain, correspondingly, holding cash means having the life-saving rations that others desperately need. The person holding cash has the power to save lives. Therefore, those with high levels of cash reserves during a downturn are the kings and can decide the fate of those in less fortunate positions.


Whereas medieval kings could decide life and death with a grain bag, managers can do so with a check. There is no longer a "king who can decide life or death in today's modern commercial society.” The king decides who needs and is most deserving of grain, and those groups get to eat and survive. In a market crisis, the power that makes cash king is the ability to deploy it in a manner that capitalizes on the value of scarcity.



So, what happened to the old woman who served Zhu the life-giving soup? Some say he brought her to live in Nanjing's palace, or maybe he rewarded her with 20,000 gold ingots. It is uncertain what happened, but we know that she could maximize her returns on a bowl of rotten cabbage soup. The old woman should be a source of inspiration for people because she shows the logic behind cash is king.


In a crisis, it is undoubtedly good to have cash, and the best thing to do is maximize the possible returns on that cash. During a crisis, the investor has an opportunity to become a king through deal sourcing and analysis. However, the key component is time management; markets will recover, and cash will lose the opportunity as a kingmaker. As we have seen in the past year, the market is capable of quickly rebuilding. Recollecting lost opportunities provides the space for avoiding the same mistakes in the future.


Everyone is concerned with the power of cash in a crisis, but the risk of investment in a crisis is more pressing for managers. Based on commonly agreed principles and the old woman's tale, investors should take risks and buy low in a crisis. We can agree on the basic principle that "cash is king." To avoid investment risks in a crisis, this belongs to the scope of project selection and risk control. The Hogwarts team continues to research the topic of portfolio selection and risk management. If readers are interested in this topic, we will conduct another feature article and share it with you.


Following the logic of “cash is king,” let’s talk about “the survivor is the king.” If the survivor is just the one who has survived, then the one is just being a survivor instead of a king. But how can one become a king? Quoting a line from Jet Li’s classic film "The New Legend of Shaolin.” Li says, "think about it. What a happy thing. People’s money becomes my money, their house becomes my house, and their wives become my wives.” This line is only slightly different, and it boils down to the survivor is king. In summary, after a crisis, the resources of competitors have become my resources, the clients of competitors have become my clients, and a competitive market has become my market. This process is how the survivor becomes king!


To achieve this, you must be strong yourself, and you can achieve it by building relationships with individuals or institutions that hold large cash reserves. The restructuring of the industry in every crisis is changing the competitive landscape and reorganizing resources. A king can be big or small but being competitive in the market during a crisis makes him king. In addition, after the crisis, the competitive environment for the weak who barely survived will be increasingly difficult.


In fact, cash is cash, and survivors are only survivors. In a crisis, cash has greater power than before, and there will be opportunities to reconstruct the competitive landscape during the crisis. To seize the opportunities in the crisis and maximize the power of cash in the crisis, cash is king, and increasing the competitive advantage in the crisis is "the survivor is king"!


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