Searching for Opportunities in an Uncomfortable World
“There is no security on this earth, there is only opportunity.”
– General Douglas MacArthur
Even as portfolios gain back some of the value lost over the last two quarters and the economy slowly reacts to government stimulus, we recognize a common characteristic in our clients: a lack of comfort.
In these times of economic upheaval, we sometimes see individuals and business owners let doubt and, at worst, fear creep into their decision-making process. An uncomfortable world forces all of us to ask difficult questions and immediately address decisions we may rather delay. Moving outside our comfort zones and into a world of change is difficult for individuals and businesses alike.
However, history demonstrates that a discipline of constant, systematic and focused review of individual habits and business processes produces opportunity as the reward. Understanding and assessing risk and making the right decisions based on the best available and most complete information is the key to survival in a recessed economy. It is also the seed to success in better economic times.
The shock of a prolonged recession has caused many individuals to understand and review their personal balance sheets with the same discipline they apply in their business lives. Indeed, the connection between an individualâ€™s financial position and that of the businesses they own or manage has never been greater.
Let us look at these two perspectives starting with a simple assumption: risk has different meanings to different people. In this article, we broadly define risk as the possibility of an event occurring that will have a negative impact on the execution and achievement of individual and business goals.
A Business Perspective
In a post-TARP world, the U.S. Treasury developed a “stress test” to determine the health of America’s largest banks in order to understand the current and ongoing risk in these institutions.
We promote a similar but more proactive approach. Regardless of their stage of development, we recommend an ongoing risk-management assessment framework for businesses that is flexible and directly aligns the business’ goals, risks and controls with those of the owners. In the current economic environment, a business may look to reduce costs in response to lower revenue forecasts. Without an ongoing assessment framework to understand and manage risk, costs may be cut across the board arbitrarily.
However, a specific risk-management assessment framework where business processes are continuously measured against industry best practices would provide a business the ability to avoid uniformed expense control decisions and balance these decisions with necessary investments to stabilize the business and set the stage for sustained growth.
In such a scenario, a thoughtful review may highlight one or two key adjustments to the cost structure that can meet or exceed the cost-cutting goal and strengthen the enterprise value. By maintaining full visibility of its business and understanding risk, management may identify an opportunity to consolidate vendors and maximize purchasing power to create a highly competitive and cost-efficient market for its business.
On the other hand, maintaining the status quo without constant review, testing and measurement of all aspects of the business may lead to inefficiency and weakness, as well as increasing the likelihood cost-cutting goals will not be met.
An Individual Perspective
An individual may set a goal for their portfolio to grow at a rate of 6% a year. In setting this goal, the individual accepts the risk attached to the assets within the portfolio that may negatively impact this goal. To invest in the appropriate assets, an individual or his/her portfolio manager needs to understand the investorâ€™s tolerance for risk before making the right investments in order to achieve this goal.
Young or old, conservative or aggressive, a simple truth remains for all investors: the greater the risk, the greater the reward or loss. As trusted advisors to individuals and businesses, we strongly believe the key in qualifying and quantifying risk is a thorough understanding of one’s goals, the plan to achieve the goals and the development of a framework by which this plan is constantly tested and updated.
Similar to businesses, individual and family budgets help monitor and control spending in order to meet wealth creation goals. A continuous review of spending by category can help determine where cuts can be made, when savings can be realized and how wealth can be created. Paying and tracking a mortgage payment is fundamental to managing a family budget, but keeping up to date with opportunities to refinance a mortgage with existing or new lenders is a key to creating wealth. In simple terms, understanding and mitigating risk drives both individual and business success and wealth.
The key to any decision-making process, especially in the assessment of risk, is a continuous and thoughtful assessment of available information. Every business owner must develop a fundamental understanding of the facts surrounding their business. Business owners need to know as much as they can about themselves and the world in which they compete. Similarly, every individual needs to understand their personal income statement and balance sheet. The better prepared a business owner or individual is to embrace change, understand risk, maintain visibility and seek out opportunity, the more likely they can begin the process of putting comfort back into what has become an uncomfortable world.
Originally published in the North Bay Business Journal, Financial Resource Guide,
May 11, 2009