Let us begin with a statement of the obvious: other than as a reserve for emergencies, cash is an irrational long-term holding in the portfolio of the long-term investor.

This is true simply because, net of inflation and taxes, cash virtually always produces a negative return. (Heck, most of the time, the return is negative just due to inflation—even in non-taxable accounts.) There is only one reason that a long-term investor might be holding a large percentage of his portfolio in cash: because he fears that the return of anything else he might own will be even more negative. In that sense, cash is not so much an asset class as a place to hide. The goal of cash is thus not to earn a return, but to prevent “loss,” as the investor defines that term.

The problem, as always, is human nature. Specifically, the largest numbers of investors historically convert the largest percentages of their portfolios to cash (a) more or less simultaneously, and (b) at the precise wrong moments. Huge consensus verging on unanimity—together with the resultant orgy of capitulation—is not merely coincident with the climax of a market decline: it becomes itself the cause of that climax.

(Note that this is an iron law governing all investor behavior, and is by no means limited to the act of flying into cash in a panic. It is equally a phenomenon of manias: the largest number of investors converted the largest percentages of their portfolios to dot.com in 1999, to condos in 2005, and to oil in 2008, more or less simultaneously, and at the most perfectly wrong times.)

One interesting indicator of historic peaks in pessimism is the relationship between balances in money market funds and the market capitalization of the entire equity market, as encapsulated in the Wilshire 5000. There are certainly other valid measures of cash, as well as other market baskets to which cash may be scaled. But since the mid 1970s, when money funds elbowed passbook savings accounts aside as America’s preferred parking place for cash, their balances have become a good indicator of the public mood. And one may as well relate them to the entire stock market as to some carefully selected subset of the market.

The following chart does just that, and its message is quite remarkable.

As you see, the first great peak in money market fund balances scaled to the Wilshire 5000 came in September 1982, at 19%. This set the pattern, inasmuch as the market had exploded to the upside in August (from levels equal to where it had been in 1966), ending a decade and a half of miserable equity returns and ushering in the greatest bull market of all time— one which would carry the Dow Jones Industrial Average from 1000 to 11,000 in the next 18 years. By this measure, the largest number of people had converted the largest percentage of their assets into cash at precisely the wrong moment.

Even this accomplishment, however, was vastly overshadowed by the market’s double-bottom which occurred in October 2002 and March 2003—the climax of what was, up until then, the greatest postwar bear market. Money market fund balances as a percentage of the value of the Wilshire 5000 peaked in both months at a historically unprecedented 30%.

Which brings us to our present pass. In the great global meltdown that reached its panic low—so far—in November of last year, money market fund balances soared to 45% of the market cap of the Wilshire 5000. (The ratio backed off to 42%, as you see, during the ensuing Santa Claus rally.)

The operative phrase in the foregoing paragraph is, of course, “so far.” Is there anything to stop the market from making new lows if the global credit crisis worsens instead of improving, or to stop money fund balances from going to, say, 60%, of the value of the Wilshire 5000? Of course not. This analysis is at best strategic; it cannot be predictive.

That said, we may return to this chart, regarding it with the awe and wonder I believe it deserves. Imagine it, dear friends. Almost one dollar in a money market fund for every two dollars of equity common stock in the marketplace. (And heaven knows what enormous percentage cash is, relative to the value of stock that actually floats.) This is a unanimity of fear which has no precedent in our lifetimes. And that much fear can be right for a while, but it can never be right for long.

There is, as I suggested some months ago in this newsletter, an immense river of cash building up behind an earthen dam of fear. The cash is a force of nature; the fear is a human emotion. The cash must move—it cannot remain where it is, earning no return— while the emotion, like all nearly unanimous emotions, must eventually give way.

We cannot know when that will happen. (Nor, for that matter, can we be absolutely sure it hasn’t already begun: at this writing, the panic lows have held for two months, and credit spreads are narrowing around the globe.) But we can feel strongly, and with good historical reason, that the dam must give way, and that we are getting ever closer to the day when it does. We have to move our clients and prospects out of cash, and we have to start doing so right now.

This is not a call on the market. It is a cry from the heart: eschew unanimity. The mob is never right, other than momentarily. And history may yet show that it was never more wrong than in the days when it was holding a dollar in cash for every two dollars of common stock in America.

Cash is irrational. Helping people recover their rationality, and thereby moving them out of cash, is Portfolio Job One in 2009.