Preparing for and Handling "Hard Times"

Introduction

As Geoffrey Blainey (1993) suggests that the Australian economic history has been a series of "Booms and Bursts". The reality is that every bubble bursts but the accurate prediction of when will it occur, how long it will last, how will we look when we come out, etc is the hard part. Furthermore, every boom has a predominant but different theme from the previous one, eg

"... in the early 1950s, it was retail and hire purchase; in the late 1960s, mining shares like Poseidon; in the late 1980s, debt-driven conglomerates like Bond Corp and Quintex; in the early 1990s, property; in the late 1990s, dot-com companies in 2000's;.." until 2008 "... it was a stock market boom with higher leveraged property and financial engineering companies like Centro, MFS, Allco, Opes Prime..."

David Hains (Portland House) as quoted by Andrew Cornell, 2009

Human beings are creatures of habit and prefer to stay in their zones of comfort. As a result we are not good at handling the unexpected and uncertainty that lie outside our 'tunnel of possibilities'. Usually the unexpected and unknown events are rare, have an extremely high impact and are low in predictability; although they appear retrospectively predictable. We need to adjust to handle them. Usually the problem lies not in the nature of the events but in the way we perceive them.

Furthermore,

"...you must never forget that every change ushers in unforeseen consequences. This applies as much to welcome change as unwelcome ones......obviously, you cannot plan for the unexpected. All you can really do is never let your guard down..."

Richard Branson, 2008

Linked with a preference to stay in your zone of comfort is a fixed mindset (Catherine Fox, 2009). A fixed mindset is a simple framework for gaining self-esteem and judging others. It encourages stereotyping by using preliminary information to decide on a fixed view. Fortunately, a brain continues to change throughout our lives. This gives us a chance to update information for better decision-making. We need to encourage a culture where we learn from our mistakes. Furthermore, when we are willing to learn, we are more receptive to feedback or criticism. Thus success depends upon effort, persistence and being prepared to move out of your comfort zone rather than innate talent.

Remember: people do not act in rational ways. Therefore, predicting behaviours and reactions is not easy.

According to Nassim Taleb (2007), there are 5 main reasons we fail to see unexpected events:

i) errors of confirmation (we focus on experience and preselected observations, and then generalize from them to the unseen; our tendency to look at what confirms that knowledge)

ii) narrative fallacy (we believe that stories will display distinct patterns; we fool ourselves with stories and anecdotes)

iii) human nature (we are programmed to handle the expected rather than the unexpected; how our emotions get in the way of logical)

iv) distortion of solid or silent evidence (we see what we want to see, ie these mis-perceptions become our reality; how we are selective in our understanding of history)

v) tunnel vision (we focus on a narrow range of well-defined sources of uncertainty; the difference between what people actually know and how much they think they know; the neglect of outside/external sources of uncertainty)

In spite of our exponentially increasing knowledge base, the future is becoming less predictable.

Some initial incorrect reaction to volatile times can be around "seige mentality" as shown by

- inaction (a very risky response)

- rising anxiety (how much worse can things get?)

- "just do something" (uncoordinated actions can target the wrong problem or overshoot the right one), eg extreme cost cutting, including staff (see above section on downsizing) and/or reduced capital expenditure. Need to be careful not to overdo cost cutting and regret this when the economy improves, ie you do not have the resources to take advantage of the up-turn. It is very difficult to predict, with any degree of accuracy, when a recovery will happen; you need to be ready for it and not be playing "catch-up footie". Also, in a down-turn, opportunities will arise that require adequate staff and other resources in order to be realised.

In hard times, some organisations will revert to a command-and-control approach rather than continuing to nurture people, as the organisations grapple with short-term financial pressures and survival.

As the current crisis started as a financial crisis, it is expected that many of the private equity businesses/portfolios will not make it through the crisis because of their financial leverage, ie they have borrowed too much money.

"...Any business which expands rapidly during a boom using high leverage can be vulnerable when the bubble bursts..."

David Hains (Portland House) as quoted by Andrew Cornell, 2009

 

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