Don’t listen to Tom rave about Buffett: Liquidity ain’t like combat readiness

Don’t listen to Tom rave about Buffett: Liquidity ain’t like combat readiness

When Mike Zak talks about finance, I listen. You should too.

By Michael J. Zak
Best Defense guest columnist

For most of us in the investment business, “liquidity” is just a fancy name for having lots of uncommitted cash (or other liquid holdings, often called “cash equivalents”) on your balance sheet.  All Buffett means is that when an investor is “fully invested,” especially in illiquid assets,
he doesn’t have the flexibility to take advantage of an investment opportunity when it comes along unexpectedly because he doesn’t have the cash to act.

Rather than “readiness,” I’d look at this more like basic infantry tactics.  One of the first things you learn (at least at the battalion level, as I recall from my long-ago days at The Basic School) was to keep one of your maneuver units in “reserve” (sometimes called a “quick reaction force”). You never quite know when you might have a threat you didn’t anticipate, or when you might have an opportunity you can exploit, so you keep that one maneuver unit off to the side and deploy it when that opportunity (or threat) comes along.

One of the tendencies in the investment business is that investment managers like to be “fully invested.”  Having cash sitting on a balance sheet, and not “at work,” is in some places considered poor form. What Buffett is saying is that he doesn’t care whether it’s poor form or not, he’s going to hold cash in reserve and look for weaknesses in asset values (in his case, the assets are securities of some kind and, on occasion, entire companies).

Historically, one of the differences between business and the DOD is that businesses are always “at war.” In general the notion of “readiness” probably wouldn’t apply since in business you are operational every day.

Michael Zak is a General Partner at Charles River Ventures, a venture capital firm in Boston and Menlo Park. He invests in early stage companies where the business is based on innovative energy technology. He also sits on the board of directors of good old CNAS.