Business Lessons From a Stock Market Crash
A slight deviation from our usual theme, but still contains very relevant business lessons from a stock market crash, whether you have investments or not.
I wrote an article on my company (CSS Investments) blog on what to do in a market crash and used a number of lessons from business building to illustrate the actions to take.
For your needs here, these lessons are the same, only in reverse.
Don’t Lose Your Mind (or Your Shirt…)
We are in the middle of one of the biggest market ‘corrections’ seen in recent years. On 24thAugust the FTSE 100 saw its biggest single points drop in its history, with almost £74bn wiped off the index’s value.
This is the first ‘big market event’ that I’ve directly experienced whilst working in this industry. As the underlying economics are still a little confusing, I’m sure it’s the same for many of you who read the (CSS Investments blog) blog.
So I’ve written my ‘layman’ view on what I’ve observed among our clients and brokers. Not from the perspective of explaining the reasons the events, but from a behavioural, psychological and ‘success principles’ one.
Whilst it appears many are losing their mind, others are quietly taking these events in their stride and capitalising on opportunities.
What seperates these two different reactions in people? That’s what I focus on here.
Markets always tell a story
Whilst these numbers above are almost meaningless to the individual investor, they do tell a story.
They tell us that there is fear in the markets.
When the markets operate from fear their volatility increases as professional investors and institutions scramble to maintain their liquidity or even solvency. Many private investors are doing the same.
But is this the right thing to do? Is now the time to be making rash decisions? Or if the horse has already bolted, how can you mitigate this risk in the future?
You Absolutely Must Have a Plan
It appears to me that the majority of investors in the world never escape the realms of average or ordinary. I don’t mean in terms of ability, because there are certainly some very capable private investors with plenty of knowledge.
I’m referring more to their level of financial success and rate of growth. You see most investors have only actually planned to ‘invest in the markets’, with only a basic understanding of their goals and objectives, and an even lower appreciation of a strategy that will get them there.
As the age old saying goes:
“If you fail to plan, you plan to fail.”
The fact of the matter is that any private investor who sets off on a course without a clear idea of where they are going has, by default, not planned at all. Likewise, those that have a plan they don’t stick to or don’t regularly measure themselves against are also doomed to remain dwelling amongst the ranks of average.
This applies to all meaningful life pursuits.
Consider business, career, fitness/health, skill development/learning for example. Would you approach improving yourself in these areas without a plan? Perhaps you would, though I’d suggest you’re less likely to realise your goals without one.
That’s because we humans work by striving towards a specific goal. In order to achieve this we work best by following a logical, measurable and targeted strategy. This limits distraction, informs us of progress and gives us a benchmark to measure our success. Those that spend time up front creating a solid plan will always get the best results in the fastest time.
There are of course a few exceptions, but they are restricted to people who are either naturally talented or just plain lucky. Sometimes it can be a combination of the two.
Don’t bank on being special
In reality, however, these examples are the ‘Outliers’. They are much rarer than you realise. We hear ‘success’ stories of people who achieve huge gains in the markets on nothing more than ‘gut feel’ or ‘getting in at the start of something’ – a trend, company growth, industry change for example – and believe this is normal.
It’s similar to the ‘overnight success’ stories you hear about people or businesses. We love to focus on the positive, the ‘big wins’, and the media loves to talk about these as it sells the news. Think Facebook, Uber, Instagram or Air B&B. Huge success, grow and profit in a relatively short timeframe.
Are you a Unicorn, a Thoroughbred or a Pack Horse?
It makes us think that, like investing, building a ‘Billion Dollar Business’ is easy. Like investing, it’s not. These are often referred to as ‘Unicorns’. They’re mythical, things of fantasy and dreams. Yes, they do happen, so unlike an actual Unicorn, they do exist.
But despite the amount we hear about these rapid growth businesses, they are incredibly rare. For every ‘Unicorn’ business, there are thousands of ‘Pack Horses’ that either just plod along, or die exhausted in the field.
In contrast, there are other businesses that start up with a planned and well developed strategy for their operations, sales, marketing, finance and product development. These businesses make slow but consistent progress, improving along the way. They gradually add capacity, staff, products etc. as they learn about their customers, industry and themselves. Perhaps these businesses will never be a ‘Unicorn’, but they become a ‘Thoroughbred Race Horse’ that wins races more often than they lose.
Investing is the same.
Many investors chase the dream of massive returns in a short time frame, turning £100 into £1 million in 6 months. No doubt sellers of ‘systems’ and the emergence of spread betting that allows you to start with a small starting bank has contributed to this. Yes, there are stories of this happening, but don’t pin your hopes on being the exception. You’d be better off playing the lottery.
The unexpected is expected
I’ve seen among our clients that those investors that take a strategic approach to their investing are more likely to end up as the ‘Race Horse’. They start with a well-considered strategy with a single focus, clearly define their objectives and have a realistic timeframe to achieve them. They are appropriately capitalised, properly diversified and don’t deviate from their plan no matter what happens in the markets. They also seek advice from a network of specialists, understanding that nothing in the markets is gospel, using this advice as a check point, sanity check or a starting point for their own research.
This is the same approach taken by successful businesses. Just substitute ‘investor’ with ‘Entrepreneur’ or ‘business owner’.
If you took the time to study the background of the most successful investors in the world you will consistently see two things: hard work and a plan. If you haven’t already, I’d really recommend you read Market Wizards by Jack Schwager, which profiles many examples of these.
You will see that even among the ones who, at first glance, just seem to have ‘got lucky’ there is always a story of planning, grit and discipline behind them. Many of the ‘less-talented successes’ in the world today, whether they are investors or businesses, got there by hard work, a plan, persistence and the discipline to follow it.
They use this plan, which they create outside the emotional arena of the markets, as a way in which to regulate these very emotions that can derail an otherwise great strategy. They follow it. They have built in rules to follow in the face of volatility or market ‘crashes’. They know that the ‘unexpected is expected’ because they have seen it before, just in different clothes.
So when events like those we have seen in August 2015 happen, they aren’t all ‘Chicken Little’ in their reactions. They’re measured, confident, controlled and able to capitalise on the opportunities these events present, rather than join the ranks of those running away scared.
How to use these lessons from a stock market crash? It’s your choice
What are your goals for your investing (or business)? Where do you want to be by the end of this year, in three years, ten years, thirty years or even beyond your own time on this earth? Do you have a strategy to guide you there?
Have you got a clear, written down plan of how you are going to achieve this? You almost certainly won’t get there without this. With this plan ready with clear daily, weekly, monthly or annual actions that you need to follow to get you to your target; you just need to take action, follow the plan and don’t get distracted by events.
Markets (whether that’s a stock market or a market your customers belong to that you serve) will always be volatile, events will happen that are ‘unexpected’ and others will panic.
But just imagine what it would be like if you have a plan to inform you what to do during such times. Imagine that you can confidently sit back and watch everyone else lose their heads with a quiet satisfaction that you don’t have to join them, and that this period of time is just one of the ‘speed bumps’ along your investment journey.
It may slow you down, but doesn’t stop you from reaching your destination.
So if you haven’t got one already, start to create an investment plan for yourself TODAY.
Do you have a plan for your investing? How did you create it? Does it help you during such volatile conditions? Let me know in the comments below.