The Investment Mood is Great, and That's When Discipline is Most Needed
Investment practices follow the same boom/bust cycle of the economy. Must they?
Investing has never been easy. Personal investment involves stocks, bonds and other financial tools that more often than not are confusing, if not downright impossible to understand for those not trained and experienced in that business. Rather than slogging through the unknown, most people hire advisors to assist in reading the tea leaves of markets and developing and following a sound investment strategy to support their individual goals and objectives.
Business investment, on the other hand, is quite different. Whether in a public corporation, privately held company, or private equity portfolio platform, investment typically involves capital, people and inventory – a far cry from stocks and bonds. Individuals use the same types of investments, even if the goals are different. No two businesses require the same capital equipment, employee skills or operating environments. And yet, all business have the same goal: maximizing return on investment.
I have been through enough business cycles to know it is human nature to be overly tight-fisted right after an economic downturn, cautiously pessimistic during the early recovery, cautiously optimistic midway through a recovery, and downright giddy at the end, or peak, of a recovery. Looking back, how many times have we wished we had spent more early on and regretted frittering away precious capital at the end of an economic cycle just before the entire industry – or economy – headed toward free-fall? But lessons learned are too often not remembered when the same, or extremely similar, events play out years or decades later.
Economists (and pundits) are quick to report economic cycles – up or down – will reoccur, yet with all their data they do a miserable job of predicting exactly when. Are economists the only profession that makes meteorologists look accurate? Economists seem to see “probabilities” of one thing or another happening, but then see another thing that may negate that probability. Ditto the business press, which seems to think some new technology or product will be such a game-changer it will single-handedly alter the course of the economy. Regrettably, both parties never seem to get it right, and economic cycles continue at their own pace.
Which brings us back to the challenge of investment. Businesses need to reinvest in their equipment, both to replace and expand capabilities, if not capacity. Staffers, whether for training or simply capacity, also require investment. Same goes for infrastructure. For some, infrastructure means bricks and mortar, but increasingly it refers to IT equipment and people to develop and support platforms for commerce, productivity, security and accounting. Each of the above, left unchecked, can devour corporate capital. All this requires managers, supervisors and executives to make decisions as to how much to spend.
While individuals can hire financial advisors to assist with investment planning and execution, in business those decisions are left to a relatively few key people. It’s only human nature to make investment decisions with emotional bias based on their view of the current economic environment.
Our industry has a legacy of developing new and innovative technology and refining it into a cost-effective, dare I say, commodity that it requires investing in excellent people. It requires new, often costly capital equipment. It requires sound, up-to-date IT infrastructure. And it requires adequate working capital to fund the ups and downs inevitable in any industry. That’s a lot of demands for relatively few renegade dollars! The only way to satisfy all the demands for investments is to balance the balance sheet. (I say “balance” because, in reality, businesses often juggle their balance sheets, hoping that all pieces do not come down at one time, revealing a potentially large shortfall.)
Balancing a balance sheet is not easy, especially in a capital- or inventory-intensive industry like electronics. It requires discipline, and lots of it. Discipline can be tough when technology is constantly changing, which requires thinking through capital investment. Discipline can be tough when regulatory authorities require significant upgrades to infrastructure for environmental, safety or security. Most of all, discipline can be tough when the economy is doing well. It is easy to get drawn into keeping up with the Joneses and investing not in what is needed but in what might impress or best the competition.
A couple of decades ago such an environment developed in North America. Business was good, the future looked bright, like a meteor dashing through the stars. As it turned out, that meteor was the dot-com bubble. When it exploded, it left many in the industry overinvested in capacity that was no longer needed and in technologies that were about to be eclipsed. Balance sheets imploded under the weight. Economic cycles come and go. Those who prosper learn from them.
Today we are fortunate to be operating in a strong, bullish economy. It’s been a long time coming, and understandably our industry is basking in the glow. But as comfortable as it may be, now is when discipline is most needed. New technologies; new, trained workers; improved infrastructure; and yes, all the capital equipment to enable it to happen can be tempting. But there is nothing wrong with being prudent and a bit cautious. A little discipline now may make the difference when – and it is not if, but when – the tide turns and the economic cycle rewards those with burgeoning working capital rather than excessive debt. Balance your balance sheet and invest in sound reality, not promises.
