Navigating Business & Markets in 2024: Two Critical Variables for Success & Survival
For the past twenty years, I have marveled at the thousands of strategies for making money in the markets and making money in business.
Often these strategies are completely contradictory to one another yet when applied appropriately, both can work. For example, some investors consider themselves contrarian investors, one of the most famous being Warren Buffet. These investors tend to look for companies who have depressed stock prices, not so much from the company’s doing but the environment in which they find themselves. When many others are selling, contrarians are looking to buy. On the other end of the spectrum, you have momentum investors who are looking for stocks that have higher prices over some period. In a sense they may be looking for a speeding train, jump on and ride that momentum to higher gains.
Very different philosophies and both can work when applied appropriately.
The above sets the framework for a distinction I would like to share and an opportunity you have as a business owner or investor in this New Year. Though there are thousands of ways to make money in business and the markets, I have been able to identify only two variables that tend to be present when people lose significant money in business or investing. I want to be clear that these are my personal observations over the past twenty years of meeting and working with thousands of business owners and investors.
The Impact of a Liquidity Crisis and Overconfidence
The two variables I have identified after examining many failed businesses and investments are a liquidity crisis and over confidence. These can happen in any order. When someone has a liquidity crisis, they are often forced to sell assets at inopportune times. Inevitably, the times at which people need money are exactly at a time when selling assets is not necessarily favorable. Think about the Pandemic. This gave many business owners a crash course in how quickly a liquidity crisis and overconfidence can create significant losses. The hospitality industry was hit harder than most industries. What do you do when you have a fully staffed restaurant that has invested significantly in their infrastructure to create a wonderful dining experience for their patrons, and ALL the patrons go away in one day?
The government stepped in and was able to help many of those businesses but for the ones who lacked liquidity to keep their doors open until that help arrived, in many cases these businesses were forced to close their doors forever.
How about some of the large bank failures? Perhaps there was overconfidence after years of low interest rates and controlled inflation that the Federal Reserve would raise interest rates at a snail’s pace should the need arrive. This would give these banks enough time to get their assets matched appropriately to their liabilities. As history has now revealed, this was not the case, and many banks failed.
Liquidity is an area that we spend a significant amount of time discussing and investigating with our clients. Each client, depending on many different variables, has a different number for what constitutes an appropriate level of liquidity. How this liquidity is housed can also vary widely. Simply leaving money in a business checking or brokerage money market account can have a significant drag on potential returns over the years.
Many of the business owners I work with have thriving businesses. With that said, when I look at the past 5, 10, or 15 years and ask them what they have to show for it…they sometimes look back puzzled. ‘What do you mean? I have a thriving business.’ Which is true, but often, that thriving business has supported an equally thriving lifestyle. As entrepreneurs, aside from lifestyle, we often are geared toward investing everything back in our business. And this can be a winning strategy…until a liquidity crisis and/or overconfidence rears its ugly head. If you have been in business long enough, you know exactly what I am saying as you have likely weathered a number of these storms.
I believe that if you are a business owner or serious investor, quantifying your need for liquidity and how to house it should be part of your New Year’s Resolution. One of the things we say at Thoroughbred Advisors is, “every day is a good day to save, but not every day is a good day to invest.”
If you would like to involve a financial professional in your discussions regarding your liquidity and growth strategies feel free to reach out to us at 518-608-4608 to have a complimentary consultation.
The information provided herein is for general informational purposes only and should not be considered investment advice. Any strategies described may not be suitable for everyone. Readers are encouraged to evaluate all information in light of their own situation, and seek the advice of an appropriate professional advisor.
Thoroughbred Advisors is a leading financial firm dedicated to providing tailored, transparent, and authentic financial solutions for their clients. Established in 2014, the firm focuses on empowering individuals, families, and businesses in the Capital Region to achieve lasting financial success.
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