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Chris DeMuth Jr. is the founder of Rangeley Capital LLC. Rangeley is an investment firm that focuses on event driven, value-oriented investment opportunities. Rangeley Capital and his value investing forum, Sifting the World (StW), search the world for misplaced bets. Rangeley exploits them for... More
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  • You Can Never Have Too Much Firepower 0 comments
    Sep 1, 2013 12:01 PM | about stocks: LMT

    Lockheed Martin Corporation (NYSE:LMT) AC-130 Spectre Gunship

    I have always loved the AC-130. It is something straight out of my childhood imagination, as if a 5-year old boy was handed the Pentagon's budget and told, "just go for it… but make it awesome". It is a big bus of a transportation plane absolutely stuffed with firepower including the 7.62-mm minigun, 20-mm rotary cannon, 40-mm Bofors gun, and a 105-mm Howitzer (the world's largest airborne gun which causes the entire plane to quake when fired).

    Why would you possibly need that kind of terrifying firepower? I don't know. But there are times when it is awfully nice to have. Rational, real-time decision making amidst risk and uncertainty is an exercise in minimizing regret. Because the future is unknown, good decisions are about the odds, not about certainties. Therefore, the key tends to be to maximize future flexibility by picking the most reversible decisions. Because you might have important new needs, wants, or insights in the future with which to make use of optionality, it is almost always a good idea to pick the most reversible course from among close calls.

    Do you pick what is easiest? Most virtuous? The most fun? I think that the wise choice is almost always the most reversible. This tends to argue contra most facial tattoos, also against close call marriage decisions. In investing terms, it tends towards "no" whenever the investment is marginal. Favoring reversibility is a mild counterbalance to the nearly universal overconfidence suffered by investors (and most others).

    Favoring reversibility as the rule of thumb for making close calls does not always favor inaction. For example, this maxim almost always argues for making bids on contiguous properties when they come on the market. I have been happy with every one purchased and regretted every one that was not. Once you own it, you can change your mind and sell. But once you pass, it could get bought and developed by someone who does not want to sell to you.

    But what does this have to do with my beloved AC-130? The answer is that you can never have too much firepower. While the minigun is oft sufficient, the downside of having a nearby 105-mm gathering dust is pretty minimal. It is nothing in comparison to the problems associated with not having it when needed. In the investing world, we are experiencing a white hot equity market this year. It is a bull market in multiple expansion driven by record margin debt. Whether or not that continues, there is a huge amount of anxiety associated with not missing any of it. If one does not like debt, then it is presupposed that one buys equity or vice versa. Short shrift is given to the alternative: do nothing, pile up cash, and preserve firepower. If that leave one underfunded, then save more or spend less. But if one lacks other opportunities, today's firepower equals tomorrow's flexibility… and you can never have too much firepower.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital, a partnership that invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our partners, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

    Stocks: LMT
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