It’s time for some black swan contingency planning « New Rules of Investing
Black Swan Contingency Planning
What’s the issue: There is an incredible amount of interdependency we’re witnessing across businesses, sectors and geographies. When a mortgage bank fails in the US, it has far-reaching consequences felt around the world. Little events are exacerbated and seemingly discrete events domino into global markets tanking. While banks like Merrill and Morgan looked as if they should weather this storm OK (albeit with some lumps), Lehman’s demise called into question these firms’ viability overnight.
What to do:
Always have a “what if everything goes wrong” Black Swan contingency plan: I’m not talking about preparing for a nuclear war or a situation where all money loses its value — if that occurs, quit your business, hock everything and buy some ammo and head to the hills. I’m talking about that Black Swan type event that could impact your business so acutely that your business may not be the same for years in its wake. Financial partners have their funding means dry up. Customers push out purchasing decisions indefinitely. Distribution channels close. In fact, small businesses are much more nimble than large firms in dealing with these types of changes but lack the staying power that comes from being a larger company.
Is”safe” really safe?: During a black swan type event, things go wrong that we didn’t expect. Is your banking partner really solid? Ask him. What if one of your trading partners goes under? Can you continue buying/selling? In my business, core money market accounts are what clients use to park their money. We’ve read of a few of these types of fund cratering. What’s going with in your firm’s products?
Backup everything that can be backed up
You can’t be too conservative: Taking risks isn’t going to be rewarded in the short term. Cash is king in this market and it will pay to preserve your business capital and business processes so that you can take advantage of the situation when the markets rebound.