About once a year I get totally suckered and start believing my ego. It’s usually after I haven’t been on my bicycle in a while. This happened the other day: I’m out on a ride and just be ripping along. It feels effortless. After a few miles I start to think that I’m actually in pretty good – no, great – shape. Then the road turns and I realize that I had a decent tailwind pushing me along. Worse, I’m now going into a headwind. I’m not flying, I’m crawling. Ugh!
The exact same thing happens in business. When times are good, the economy’s booming, and we’re making money hand over fist it is easy to get suckered into thinking that it’s our innate skills propelling us along. Remember all the folks who quit their jobs to become day traders during the dotcom boom? What about all the real estate “experts” during the housing bubble? Then, the wind changed… Those who have been through the cycles before tend to do ok; those who mistake the tailwind for greatness tend to flame out spectacularly.
Why? Because they probably weren’t doing a good job of managing the business – conditions were simply so favorable that they could be ineffective and still get away with it. The booming economy masked their errors. When the economy shifts, there is no longer a margin of error to permit sloppiness. Additionally, if they think it was them rather than the circumstances that enabled success, they will continue doing what they’ve been doing rather than adjusting to changing conditions.
There’s no shame in making money during an economic tailwind. The trick is to recognize that it’s simply part of the cycle and realize that there’s a headwind coming. Then you can plan, prepare, and be ready for it.
The flip side is that when ride in a headwind, it feels miserable and hard and like it will never get better. Right now there’s a headwind. A tailwind is coming again and 99% (I just made this number up, but think it’s pretty accurate) of us will forget the lessons of the current economic headwind. Just like we did after 2001 and all the previous recessions before that.
[As an aside: I have a suspicion that many (not all, but many) of the investing or business gurus got in and out during a tailwind and confused ideal circumstances for brilliance. Fortunately for them, we don’t realize that and buy their ideas (which may be irrelevant or even detrimental during a headwind). ]