Learning from Buffett (II): Is liquidity the financial equivalent of readiness?

No, Warren Buffett doesn’t know how to assault a machine gun bunker or check out the maintenance record on a Bradley fighting vehicle. But he does know how to prepare for the financial equivalent of combat and take advantage of chaos and panic. "To finish first, you must first finish," he observes (p. 22) as he begins to discuss lessons of the financial crisis of September 2008, when, as he notes, the American economy veered dangerously close to collapse. Credit, he explains, "is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed."

Liquidity strikes me as the financial equivalent of combat readiness, the thing that has allowed Buffett famously to boast that when others get greedy, he panics-and that when others are panicking, that’s when it is time to get greedy. "Having loads of liquidity [in the company]. . . lets us sleep well. Moreover, during the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offense while others scramble for survival. That’s what allowed us to invest $15.6 billion in 25 days of panic following the Lehman bankruptcy in 2008."

My question: If I am right and liquidity is the financial equivalent of combat readiness, could the academic literature and theory of financial liquidity be used to illuminate better our understanding and even measurement of readiness? This would be a good project for one of youse smart military officers doing a double degree at the Harvard Business School and the Kennedy School of Government. I think to explore the connection, don’t turn first to discussions of military readiness, but rather to studies of the nature of sustained combat effectiveness, and see how measures of liquidity might be applied to that area. You might wind up being the Black-Scholes of military theory.