Dry Powder

Do you remember the days when we all carried flintlock rifles and had a horn full of gunpowder slung around our necks?

Flintlock Rifles

When we ran into trouble, we had one shot.  Then we had to pour dry gunpowder from the horn into the gun barrel followed by a metal ball and a wad of cloth.  After tamping this firmly into place, we were then ready to fire one shot again.

Fighting a battle this way required two key factors: 1) our opponent was slow enough to allow us to reload and 2) the gunpowder was dry enough to fire.

Well, I’m not old enough to remember the days when this occurred (about 150 years ago), but I have owned a flintlock rifle and have seen battles using flintlock rifles recreated in many movies.

Investments

These days the phrase “dry powder” is again being used in somewhat of a similar situation.

Dry powder is a slang term referring to marketable securities that are highly liquid and considered cash-like. This is money that has been given to private equity companies but is not invested in the market due to, in addition to other considerations, fear that the market may be unstable, and the investment becomes worthless. It is gunpowder that is still in the horn and not in the gun, but it is dry and ready if needed.

Dry powder is un-invested money; money that is doing nothing for anyone; money that is held out of the financial markets due to fear. And the amount of dry powder has grown from slightly over $200 billion to slightly over $900 billion in fifteen years. And it is doing nothing.

Business Stewards

As business owners, we are to be good stewards of our businesses. Most of us have a reserve account, a line of credit or a “rainy-day-fund” to give us security in the event of some unexpected financial need. Some financial needs may be a catastrophe such as a vendor bankruptcy, and some may be beneficial, such as a chance to purchase a much-needed piece of equipment at a one-time deep discount.

But for us, these reserves are kept in check by our sense to make our investments work and earn a return. Most of us will never have the cash reserves that are reported by many of the large companies today.

Our dry powder needs to be limited to the amounts we realistically need and not to the excesses we are now seeing in the financial markets. The excess dry powder is a waste of resources because it is doing nothing.

The Bible

Three Proverbs that are relevant to excessive dry powder are.

The plans of the diligent lead surely to abundance,
but everyone who is hasty comes only to poverty. (Proverbs 21:5)

The prudent sees danger and hides himself,
but the simple go on and suffer for it. (Proverbs 27:12)

 the ants are a people not strong,
yet they provide their food in the summer; (Proverbs 30:25)

 

Throughout the Bible, God encourages us to trust in Him completely.  He will provide, but He also teaches us to be wise and be prepared.

Both professionally and personally we need to have dry powder but kept in reasonable amounts.