Photo by Nathan Dumlao on Unsplash

Most of what I learned about finance I learned from many different people. I feel lucky to have known each one of them.

Among the biggest lessons I have learned in finance from these people are:

(1) you can have massive wealth in terms of assets and yet sometimes in the short run you can have no cash;

(2) cash is the oxygen of business and

(3) running out of cash is the only unforgivable sin in business. Assets that are not liquid trade at a discount for a very good reason.

Another lesson I learned is that a business with an ability to raise billions of dollars in debt in one day may not be able to raise five cents a day later. Credit markets can literally change direction overnight. And precisely when that happens is not predictable. For that reason having a margin of safety on cash is very wise. Cash can have tremendous optionality when things go wrong in the markets. But dry power in the form of cash has real costs (negative arbitrage). Getting the mix right is tricky and depends on the company, industry, business cycle industry and economy.

A smart CFO I worked with for many years used to say: “If you want to understand better what credit quality actually is, watch how the bank debt is trading. Bank debt is senior and the banks have deeper information based on stronger covenants. They are an early warning system.”

Speaking of CFOs, a great one is a pleasure to watch work, particularly in a capital intensive business. Financing is an art and a great CFO is an artist.

Lastly, one interesting thing about debt is how some people are comfortable having loads of it. Even being billions of dollars in debt does not stop them from sleeping like a baby. It was J. Paul Getty who once said: “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” Perhaps that is the right explanation for some people’s comfort with having loads of debt.

Some food for thought...