What a wild start to the year it’s been already! I’m writing this 3 weeks into 2016. The markets are in turmoil. The Dow Jones Industrial Average, a good indicator of the stock market as a whole, finished 2015 at 17,603.87, down 2.2%. Yesterday it closed at 15,766.74, down 10% in just 3 weeks.
Oil has dropped more than 50% in 6 months, which has contributed to the Canadian dollar dropping over 20% against the US dollar in that same time period.
Obviously oil companies have been hit hard by the drop in oil, which hurts local and regional economies dependent on the oil industry. Those who buy US goods and services with Canadian dollars, like a business I’m involved in, have seen their costs go up by 20% over 6 months and 50% over about 3 years.
No one can consistently predict shocks to the market like this, but there is one thing we can always expect: the unexpected.
Unexpected events are a part of life. Our success and happiness depends on how well we plan for and then deal with the unexpected.
I’m reading Pour Your Heart Into It: How Starbucks Build a Company One Cup at a Time by Howard Schultz, the Starbucks founder. It has many great lessons about the challenges of building a business that is now ubiquitous throughout the world.
In 1994 the price of green coffee, which closely tracks the price of their raw materials, went from $0.80 to $2.74 in a short time. The price increase was caused by an unexpected freeze in Brazil, the largest supplier of green coffee. Starbucks' stock price tanked, threatening its ability to continue its expansion and even survive.
Schultz and his management team struggled for months with when to raise prices and by how much, how much inventory to buy and when to hedge against continued price increases, how to manage shareholder expectations, etc. They made mistakes, such as buying millions of dollars in inventory right at the peak price, but they had built so much goodwill with their customers, suppliers, investors, and employees that they were able to survive the crisis and continue thriving.
By definition, we don’t know what unexpected events will be and when they will happen. But we can design our lives and our businesses to be ready for the unexpected.
Expect it
The first step is to simply expect the unexpected. You won’t get too comfortable if you always acknowledge that the unexpected will happen.
By nature we think that the status quo will continue. If our business is thriving, we tend to think the good times will never end (talk to anyone involved in the housing industry in 2006). If we’re going through a struggle, it’s hard to imagine life without that struggle (ask them how they were feeling in 2009).
However, we need to fight against our natures and remind ourselves that anything can rapidly change.
Scenario plan
Although we never know exactly what is going to come, we can think through the possible scenarios. It may help to consider both likelihood and impact.
It's not very likely that you will die young, but if you do, it will probably have a huge impact on your family and business. The solution is cheap and simple: life insurance.
It's likely that the various financial and commodity markets will experience periodic shocks. What impact will that have on you? How can you prepare? Minimizing debt, diversifying, keeping a cash reserve, and hedging all help prepare for financial shocks.
Leave plenty of margin
We usually think of margin in terms of the money left over from selling a product. It’s important to have margins as high as possible in business so we can cover our fixed costs and leave cushion fluctuation in sales and costs.
Margin is a helpful concept for many other applications. Don’t plan your schedule so tightly that you have no room for health challenges, family crises, etc.
Don’t give up
Do be shocked and discouraged by unexpected events. Don’t give up. As Winston Churchill said, “if you’re going through hell, keep going” and “never, never, never give up.”
Our character is strengthened more in hard times than good times. People who achieve their dreams are the ones who persevere through challenges. The businesses that thrive are ones who survive the lean times.
Unexpected events will happen. Your success and character will be defined by how you plan for and react to these events.
Question: What helps you prepare for and react to unexpected events?